McNulty - May 4, 2000
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.
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
- Personal digital assistants, such as Palm
- Apple Macintosh systems
- Consumer client systems for dedicated Web access (e.g., WebTV systems
from Philips Magnavox & Sony)
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.
are three principal market models. Most vendors have adopted parts of
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.
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.
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:
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
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.
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.
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.
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
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: Dimension XPS
Optiplex, Precision Workstation
has built the most successful PC business in the world. Far be it from
us to tell them how to do it better.
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.
product lines, especially its business and high-end systems, don't map
cleanly into our categories.
Deskpro Workstation, Professional Workstation
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
sales strategy is the opposite of Dell's. It targets the consumer, but
doesn't mind picking up business sales along the way.
Select, Profile (flat screen)
Astro, joint Gateway-AOL "appliance" project
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:
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
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.
NetVista (not yet shipping)
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.
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.
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.
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.
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
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
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.
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
vendors should be embracing the direct model - both as a distribution
vehicle and as an entry into broader e-commerce and e-procurement marketplaces.
sum up our broad vendor recommendations:
Dell - Stay the course.
- Develop a direct sales capacity - for real.
- Needs a workstation-class offering.
- Must manage its inventory and pricing closely to stay competitive.
- More aggressive marketing
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.
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.
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.