Computer makers in ‘race to the bottom’

3 Nov 2005

The PC industry is in for a bumpy ride as highly standardised products, low margins and oversupply continue to push the market toward a “race to the bottom” in the pricing of products, market analyst Gartner has warned.

Many leading PC suppliers have operated at near-zero margins since 2001. PC vendors’ problems have been exacerbated by an apparent inability to differentiate their product offerings through anything except price. At the same time improvements in hardware performance have outstripped the growth in requirements from mainstream applications, allowing users to buy cheaper and more basic machines.

Despite falling prices, Microsoft and Intel have maintained their per-PC revenues at near constant levels over the past two to three years. With most vendors finding it increasingly difficult to fund further price reductions from internal costs, Gartner expects Microsoft and Intel will also come under increasing pressure to innovate to maintain market growth and profitability from PCs.

“The key question for the industry is when and how quickly these changes will occur,” said Brian Gammage, vice-president at Gartner. “Initially, the changes will be gradual, but are likely to see rapid acceleration as the industry trades volume for margin. Such acceleration could be precipitated by macroeconomic conditions, or a further slowdown in replacement buying.

Analysts predict that annual PC shipment growth will average 8pc between 2006 and 2009, but revenues will remain flat, leaving many vendors to struggle for survival. The formerly safe profits in mobile computing are under attack as plentiful component supplies enable a price-driven market expansion. “The growing gap between realistic levels of profitability and shareholder expectations will intensify pressure on PC vendors registered in the US, Japan and Europe, opening up the market to emerging market vendors which have lower labour costs and/or more modest margin objectives,” said Gammage.

Gartner concludes that although the changes in the marketplace will result in a healthier global PC industry, it will be a challenging period of adjustment for the industry and users.

By Brian Skelly