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Desktop PCs: Meet the New Boss, Same as the Old Boss… (Dell)

Written By: C. McNulty
Published On: May 4 2000

Desktop PCs: Meet the New Boss, Same as the Old Boss (Dell)
C. McNulty - May 4, 2000

Market Overview

Non-portable, Intel compatible PCs remain the primary vehicle for supporting most applications in the modern organization. Intel/AMD-based processors and internal hard drives distinguish systems in this category.

It also helps to point out what is not included in this market:

  • Thin clients and dumb terminals

  • Intel-architecture systems which require network access for most key functions

  • Personal digital assistants, such as Palm

  • Apple Macintosh systems

  • Consumer client systems for dedicated Web access (e.g., WebTV systems from Philips Magnavox & Sony)

Average sales prices have recently hovered near the $900 mark, according to PCData. The desktop PC market has matured, with worldwide growth projected to hover near 7% during 2000, although U.S. sales should still enjoy a healthy 15% growth rate. Based on current growth rates, we forecast this market to show revenues of US$ 109 Billion during 2000.

There are three principal market models. Most vendors have adopted parts of all three:

Direct: The vendor sells via the Web (or phone) directly to its customers. Customers have a limited range of custom features they can select. Dell is the obvious leader in this market, with Gateway also a strong contender.

Retail: Sales of preconfigured systems take place in physical, bricks and mortar stores. Retail stores appeal more to consumer and small office/home office markets ("SOHO"), than to large enterprise purchases. HP recently nosed ahead of Compaq in retail sales.

Reseller: Sales are made via a channel of "middlemen", who may be value added resellers, consulting organizations, warehouse distributors, or large online storefronts (e.g., Computer Discount Warehouse.) IBM and Compaq have the most extensive reliance on reseller channels.

We also distinguish several subcategories within the desktop PC market:

Consumer: Lower price desktops, typically less than US$ 750, frequently with AMD or Intel Celeron processors and 64MB of RAM or less. Hint - look for Intuit's Quicken preinstalled.

Business: Midrange PCs, typically selling from US$750-1750. Usually available with Intel processor speeds up to the top of the line, current 1 GHz. Another clue - Microsoft Office is usually preinstalled.

High-end: Processing performance oriented systems, usually selling for more than US$1,750. Typical features include multiprocessor support and Windows 2000 or Windows NT preinstalled. These systems are usually intended for CAD, financial analysis, graphic design, or software development.

Appliance: Compact, modular closed case PCs. This category has emerged in the last 12 months as the Intel-compliant vendors have responded to Apple's all-in-one, compact, network ready iMac. These systems have few, if any replaceable or upgradeable parts. These systems typically have integrated Ethernet, and extensive use of USB, but little or no use of 1.44MB floppy drives, ISA, or PCI. Usually priced under $1000.

Market Winners

Remember the accolades for Dell (NASDAQ:DELL) late last year, when Dell finally nosed ahead of Compaq (NYSE:CPQ) for the sales lead in the U.S.? Well, they can keep partying in Round Rock. Dell enjoys a commanding market share and sufficient sales momentum to continue extending its lead over archrival Compaq.

Dell's Dimension line spans our categories. Like Dell as a whole, its more aimed toward general business users but isn't averse to picking up some consumer sales as well. The Dimension L, with a Celeron processor, is the consumer version; the Dimension XPS, with a Pentium III, is obviously the general business system.

Consumer: Dimension L

Business: Dimension XPS

High-end: Optiplex, Precision Workstation

Appliance: WebPC

Dell has built the most successful PC business in the world. Far be it from us to tell them how to do it better.

Although Compaq is far from down and out, we do not see Compaq regaining the lead during 2000. Compaq is retooling its sales models to be more direct. (We project only a 36% likelihood that they will be able to move the bulk of their sales to the direct model.) Compaq's recent purchase of Inacom, a direct PC distributor, will help Compaq - both for build-to-order capacity and by cutting off HP and IBM (currently Inacom customers) from Inacom's services. The market has given Compaq several tries on direct sales. Compaq probably has only one more.

Compaq's product lines, especially its business and high-end systems, don't map cleanly into our categories.

Consumer: Presario

Business: Prosignia, Deskpro

High-end: Deskpro Workstation, Professional Workstation

Appliance: iPaq

Market Challengers

Gateway, Inc. (NYSE:GTW) and Hewlett Packard (NYSE:HWP) mirror the Dell/Compaq rivalry. Dell & Compaq are both headquartered in Texas; Gateway & HP are both in California. Here, Gateway is the direct sales leader, with little in the way of R&D. Gateway does have a retail component, but its retail sales take place in the company's own chain of Gateway Country stores in the U.S. Gateway's direct sales continue to pull it ahead of Hewlett Packard.

Gateway's sales strategy is the opposite of Dell's. It targets the consumer, but doesn't mind picking up business sales along the way.

Consumer: Essential

Business: Select, Profile (flat screen)

High-end: Performance (uniprocessor)

Appliance: Astro, joint Gateway-AOL "appliance" project

Their product mix makes sense given their market focus. However, Gateway has always wanted more of the business market - witness its 1996 purchase of ALR to augments its server offerings. A top-end workstation - i.e., multiprocessor - would help.

HP offers technical superiority, global coverage, and a full range of service offerings. Their Pavilion line of consumer desktops has been the principal beneficiary of IBM's exit from the consumer retail market. HP's product lines include:

Consumer: Pavilion

Business: Vectra, Brio

High-end: Kayak

Appliance: e-Vectra

However, HP's message is disappearing from the landscape. They need to draw attention to their deep technical advantages via aggressive marketing to avoid becoming an also-ran - in the minds of buyers, service providers, and software vendors.

Market Losers

IBM. (NYSE:IBM) IBM is gradually retreating from the market. Late in 1999, IBM announced they would withdraw from the consumer/retail PC portions of the very market they created in the first place. IBM's consumer line, the Aptiva, has not been able to compete against the Presarios and Pavilions of the world.

Consumer: Aptiva

Business: PC 300

High-end: Intellistation

Appliance: NetVista (not yet shipping)

IBM needs to capture mind share, as well as market share, with the NetVista. It must avoid supply problems that have plagued IBM in the past (especially in its ThinkPad notebooks) and uncompetitive price points.

In IBM's consumer market withdrawal, they are following the lead of other companies, such as Unisys and NCR. These companies have decided there is little value in maintaining a brand presence in a market no longer critical to the business. We expect to see further consolidations or market exits during 2000.

BOTTOM LINE
Market Predictions

This market just keeps growing and growing - annual growth rates have ranged from 12 to 21% during the past several years. This trend will flatten during 2000. We forecast that the worldwide PC market will total 127,326,000 units in 2000, 51,565,000 of these in the U.S. This translates into a 15% rate in the U.S., but only 7% globally.

Remember the accolades for Dell early in 2000, when Dell finally passed Compaq for the sales lead in the U.S.? Well, they can keep partying in Round Rock. Although Compaq is far from down and out, we do not see Compaq regaining the lead during 2000. It remains to be seen how long Compaq needs to restructure its commercial PC unit (which actually lost money in 1999), which will be necessary to regain its lost leadership position.

We also forecast that Hewlett Packard will widen its lead over rival Gateway, which finished 1999 in a statistical dead heat. HP is also on track to pass IBM for the #3 position in worldwide unit sales. Finally, IBM's unit growth will decline as the company exits the consumer playing field. HP, so far, seems to be the principal beneficiary of IBM's decision.

US - Annual
Vendor
2000 Shipments
Market Share
1999 Shipments
Market Share
Growth
2000-1999
Dell 9,770,668 19% 7,493,000 17% 30%
Compaq 8,615,120 17% 7,222,000 16% 19%
HP 5,450,922 11% 3,959,900 9% 38%
Gateway 4,847,885 9% 4,002,000 9% 21%
IBM 3,218,890 6% 3,274,000 7% -2%
eMachines 2,467,500 5% 1,519,500 3% 62%
Apple 2,198,745 4% 1,679,000 4% 31%
Other 14,995,924 29% 15,791,600 35% -5%
All 51,565,653 100% 44,941,000 100% 15%

 

Another trend to watch in 2000 is the move toward slimmed-down desktops, such as the Compaq iPaq and HP's e-Vectra. Call them appliance PCs. They are more potent than earlier nods toward diskless, Java-based Network Computers, or NC's. These systems promise easier manufacturing and support costs, but it remains to be seen if the market is ready to deploy unexpandable PCs. Appliance PCs are certainly cheaper to build and to buy. It remains to be seen if they are cheaper to deploy and support.

Finally, Linux will continue to take tentative steps from the server room toward user cubicles during 2000. Most vendors offer Linux-certified systems, and some (Dell) even offer Red Hat Linux preinstalled. However, this trend will only catch fire when there are critical applications available for Linux - not just MS Office compliant suites, such as Sun's StarOffice.

Leading office suites available for Linux include StarOffice and Corel's WordPerfect Office 2000. IBM's Lotus Development Corporation, after the disappointing results for its Java-centric eSuite, has been reluctant to enter these waters. However, given IBM's heavy leanings toward Linux in its Enterprise Systems Division, we expect a Linux version of Lotus SmartSuite to be announced during the next 12 months.

Obviously, the proverbial 800-pound gorilla is Microsoft. Given Microsoft's focus in finishing Windows Me and its consumer version of Windows 2000 (codename "Whistler"), and the ongoing distraction of the U.S. antitrust action, we do not expect to see a Linux version of Microsoft Office anytime in the next twelve months.

Vendor Recommendations

The market has clearly matured technically. Integrated video, Ethernet, and audio have become de rigueur. This minimizes the advantage of technical innovation, and maximizes the value of streamlined sales operations. The market has borne this out; vendors with "direct-heavy" sales improve (Dell, Gateway), at the expense of more traditional organizations, such as IBM and Compaq.

Desktop vendors should be embracing the direct model - both as a distribution vehicle and as an entry into broader e-commerce and e-procurement marketplaces.

To sum up our broad vendor recommendations:

Dell - Stay the course.

Compaq - Develop a direct sales capacity - for real.

Gateway - Needs a workstation-class offering.

IBM - Must manage its inventory and pricing closely to stay competitive.

HP - More aggressive marketing

User Recommendations

Get used to buying direct. In the future, there will be few other choices. Companies used to large contracts and personally negotiated prices will have to adapt their budget and procurement cycles accordingly. A full discussion of e-procurement is beyond the scope of this note, but vendors like Dell already offer a raft of allied products from non-Dell vendors on their site.

We also believe the ever-expanding network management market minimizes the need to lock-in a single vendor. Don't be afraid to comparison shop now. Although there are clear strategic advantages to standard platforms, products like CA Unicenter or Intel LANDesk can provide the unifying glue during a desktop vendor transition. It's still a buyers market.

Despite the desktop market's maturity, hundreds of products are available. Users need to focus on one question to narrow their choices - what systems will run the OS that supports their line-of-business applications. Everything else is a question for the test labs.

 
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