Is The Pc Boom Over?

It was strangely quiet in the PC and laptop aisles of the Union Square CompUSA in San Francisco last week. One patron was playing solitaire on a $2,600 Sony VAIO desktop. A few others were watching "Terminator 2" on a flashy flat-panel screen. No one was shopping for a new computer. "When I got here four months ago, you didn't have five minutes to yourself," says salesperson Steen Lucas. "Now, there's nothing going on." Wall Street seems to agree. In the past few weeks, profit warnings from PC makers Apple and Dell and chipmaker Intel have sent PC stocks diving in an already gloomy market. Apple is now down 65 percent since Labor Day; Dell, 37 percent. PCs are also stagnating on store shelves: shipments in the United States were up only .03 percent in the first half of this year, and Apple recently announced a steep $300 rebate on its much-hyped Mac Cube. Is the PC market--an engine of the Internet economy and an indicator of our overall economic health--starting to sputter? The PC firms themselves don't think so. Each had an excuse, ranging from weakness in the European market to consumer jitters about the economy, for what Apple CEO Steve Jobs dismissed as a "speed bump." But some analysts paint a more disturbing picture. They say the industry has reached saturation. Most consumers and businesses already own computers and replace them only once every few years.

Not that long ago, Americans couldn't buy PCs fast enough. The industry has enjoyed a robust 15 to 20 percent growth rate since the mid-'90s, and today, 57 percent of households own a computer, according to Odyssey, a research firm. But the unwired minority will be a hard nut to crack, says Gartner Dataquest analyst Martin Reynolds. "We're looking at households that have very limited resources or have no need for a PC." As a result, data firm IDC scaled back its predictions for growth in the U.S. market and now thinks sales this year will increase by only 12 percent--while Reynolds speculates growth could stop altogether within two years.

Another factor contributing to the slowdown is that even the cheapest PCs today have the memory and processing muscle to run most software and connect to the Net. Consumers are therefore buying cheaper models, which translates into a lower average selling price and meeker profits.

Gateway CEO Jeff Weitzen said as much last week. He announced his company had actually met earnings estimates, but he credited non-PC sources of revenues like consumer-training programs and Internet access, which now account for half the company's profits. "There is no doubt that the traditional PC industry, where we just pushed the latest and greatest hardware... out the door is rapidly changing," he said. In other words, the PC business is a pretty volatile place to be these days.