PC Industry Consolidation: Who's Going to
Be Left Standing? And How Does This Impact Small Business?
But what will this mean for GTW, CPQ, HWP, Dell
Computer Corporation, and IBM Computer?
Even before the unthinkable September 11th tragedies,
the U.S. economy and PC industry were already reeling from the worst
malaise in years.
A week earlier, during the U.S. Labor Day weekend, Hewlett Packard (HWP) announced
it was buying Compaq
(CPQ)
immediately fueling speculation over continued consolidation and raising
eyebrows over what the combined HWP/CPQ company would look like.
The HWP/CPQ merger also accelerated ravenous gossip over
which tech giants would be the next to approach the alter together. Many
of the top PC makers have been through some brutally cathartic layoffs.
All the major PC players, Compaq (CPQ), Dell, Gateway (GTW), Hewlett
Packard (HWP), and IBM, have been impacted.
So as we rapidly approach 2002, I set out to find some
answers. Which PC makers would be left standing in 6 weeks, 6 months and
1 year? How will Compaq (CPQ), Dell, Gateway (GTW), Hewlett Packard
(HWP), and IBM fare? And how will this continued shakeout impact our small business
readers?
Industry Outlook - Consolidation and Alliances
The PC industry consolidation is hardly a shock to
Andrew J. Neff, one of Wall Street's top tech analysts.
As an Equity Research analyst for New York-based Bear
Stearns,
Neff issued a rude awakening to the PC industry in January, sounding the
consolidation alarms in his PC Industry Manifesto, a report unmistakably
subtitled, "It's Time for Consolidation: Better Now Than
Later".
Forecasting ten months ago that Dell Computer
Corporation should make a play
for IBM's direct PC
operation, that Gateway's
(GTW)
retrenchment with recently returned founder and folk hero Ted Waitt was
on borrowed time, and that Hewlett Packard (HWP) should buy Compaq
(CPQ), Neff has
been advocating that some well-reasoned, albeit radical and
unconventional, mergers and alliances must take place immediately to rid
the PC industry of its massive overcapacity.
However, when asked about the 12-month outlook for the
major PC vendors, Neff is optimistic and added, "I expect them to
all be solvent -- when growth slows, they tend to generate cash."
As a coping strategy, Neff sees the major PC vendors
"trying to reduce expenses to reflect the revenue level, in some
cases --- seeking growth in other cases."
1400 miles away in Houston, Nivine Zakhari, director of
MSPros,
a Microsoft Certified Partner, seems to agree with Neff.
"Although most are still questioning the rationale
behind the HWP/CPQ merger, I expect them to be relatively 'healthy'
through the end of 2002, as they try to integrate their
organizations", Zakhari explained. "Along with Dell Computer
Corporation and IBM, I
expect all the major PC vendors to survive 2002, barring any
catastrophic events, of course."
Industry Outlook for Japanese PC makers
The prospects for Japanese PC makers, such as NEC, Fujitsu Siemens, and Sony, look markedly
bleaker.
Just like Neff, Zakhari is also bearish on Japanese PC
makers, singling out one in particular. "Toshiba may have a
little more difficult time. Toshiba is well known for solid portables,
but their desktops and servers are not as well received and may end up
being a liability for Toshiba in the long run. My hope would be that
Toshiba focuses on stronger products and cuts their losses on
others."
When asked about a single event that could cause a major
PC industry shakeout in 2002 on the order of the HWP/CPQ merger
announcement, Neff expects "some mergers of Japanese
companies."
Industry Outlook for Gateway - Also Singled Out
Both Neff and Zakhari concur on the outlook for Gateway
(GTW).
A Wall Street-er at heart, Neff feels that Gateway's
(GTW)
elimination of international operations and massive headcount reductions
has basically completed their retrenchment.
So Neff urges Gateway's (GTW) Waitt to put the company up for
sale.
Zakhari is less optimistic about Gateway (GTW). "If I
were to express concern about any major OEM making it through the first
half of 2002, it would be Gateway (GTW). Their Country Stores are nice, but
they add to Gateway's (GTW) overhead and don't make as much sense as utilizing
the retail channels like Compaq (CPQ) and Hewlett Packard (HWP), or sticking with
the pure direct model like Dell."
Gartner Dataquest, in a September 4th report on Gateway
(GTW),
also cautions that Gateway's (GTW) "stores will continue to drain
profitability. The Gateway Country (GTW) stores can provide high customer
touch, but Gateway (GTW) has not yet realized this potential fully."
Present and Future Industry Wide Changes
In addition to Dell Computer Coprporation's recently announced strategic
alliance with storage leader EMC, Neff foresees another strategic
alliance, rather than a merger, between Dell and Sun - playing up Dell's
strength in corporate PCs and Sun's muscle in enterprise class servers.
In an October 26th update to his original January PC
Industry Manifesto, Neff broadens his predictions beyond the PC
industry, rebranding his report as a "Computer Industry
Manifesto", and reiterates his recommendation for IBM to exit the
PC business and partner up with Dell.
Gartner Dataquest is also equally bullish on Dell,
citing Dell as the only PC maker avoiding double-digit negative
domestic shipment "growth".
According to Gartner Dataquest's vice president of its
Computing Platforms Group Charles Smulders, "Hardware performance
has leapt ahead of most common software requirements, which provides the
opportunity for users to extend their PC life cycles."
Zakhari doesn't foresee "a single sudden event that
would cause a major shakeout, unless there is another huge merger
announced. The changes will be gradual, as with most other industries
that have matured. But in the high-tech sector, gradual may still only
take a matter of months vs. years."
Protecting Your Company from PC Orphans and Worthless
Product Warrantees
So given the pending industry consolidation, newly
announced and forecasted alliances, and projections of doom and gloom
surrounding Japanese PC makers and Gateway (GTW), what can you do as a small
business to protect yourself?
What's the best way to avoid buying all of your PCs from
a company that may not be in business next year?
Although graced with the handholding support of Bear
Stearns' world-class IT pros, Neff recommends that small businesses
"go with an established (PC) vendor with a strong balance
sheet", but feels that inevitably, "some small businesses may
get stuck with equipment that is no longer supported."
Zakhari echoed similar sentiment. "Go with big
names that have demonstrated quality, stability, and reliability in the
past: Compaq (CPQ), Dell, HP (HWP), and Toshiba would be my top picks."
The Future of PC Clones and "White Box"
Value Added Resellers (VARs)
As branded PC prices plummeted over the past few years,
many industry watchers, myself included, have repeatedly predicted the
end of the PC clone market.
Yet even though popular opinion is all over the board,
clone builders seem to have incredible resiliency and customer loyalty.
Gartner Dataquest remains bullish on the outlook for
"white box" VARs. Smulders explained how "the market is
experiencing a significant PC component surplus...creating a resurgence
in the non-branded (white box) PCs. The oversupply situation is expected
to last throughout 2002."
Neff, somewhat less optimistic, added, "some (of
the 'white box' VARs) with established customers will do well, but
margins will be under pressure."
Zakhari's take on the "white box" VAR was
outright pessimistic. "It's going to be a lot more difficult for a
small business customer to justify going with a local VAR when the small
business customer could have name brand PCs with warranty service
available. Larger PC vendors can throw the hardware in at cost just to
get the opportunity to do some consulting, which is where the real money
is. If you look at how cell phones are being given away, it's not hard
to see how the hardware aspect is moot. It's all about services
now."
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Spare PC Hardware
Tip #18 -- Figure out your cost of downtime and invest
accordingly in spare PC hardware.
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