The surprising strength of the PC market this year will not provide PC vendors with a corresponding rise in revenue, according to a forecast released Monday by Gartner.
After initially downplaying expectations for the PC market in 2005, Gartner and fellow researcher IDC have reported that unit shipments have risen at roughly the same pace in 2005 as they did last year. However, price cuts appear to be fueling that growth, said George Shiffler, principal analyst with Gartner, on Monday.
As a result, worldwide revenue from PC sales will only grow 0.5 percent in 2005, despite projections of a 12.7 percent gain in shipments, Shiffler said.
PC industry companies like Intel and Hewlett-Packard Co. have posted solid results this year as consumers and corporations have continued to replace their older PCs, often with higher-margin notebooks. Intel's chip factories are running at full capacity, and HP's PC division posted its best quarter last week since the company acquired Compaq in 2002.
However, market-share leader Dell's second-quarter results might be a sign of the difficulty in store for the PC industry in the second half of the year. Dell missed Wall Street's quarterly revenue expectations for the first time in quite some time, as it failed to convince customers to upgrade their orders to configurations that generate higher profits for Dell, company Chief Executive Officer Kevin Rollins told reporters and analysts last week. Dell's desktop PC shipments grew by 17 percent, and shipments of its mobility products grew by 47 percent, but the company's overall revenue fell just short of its expectations.
The long, drawn-out purchasing cycle of PCs bought to replace pre-Y2K systems is coming to an end, and vendors are trying to stimulate demand by cutting prices, Shiffler said. "People are sensing that growth is about to fall off, and one of the ways you can fight that is by cutting price," he said.
PCs are notoriously low-margin products, one of the reasons IBM gave up on its well-regarded PC business earlier this year and sold the division to Lenovo Group. Vendors have been trying to improve margins by selling PC users on the benefits of notebooks, but the majority of the market is still buying desktop PCs, for now, Shiffler said.
As the prices of notebooks decline, that forces the price of desktops down as well, Shiffler said. PC buyers are getting great values, but vendors are being forced to sacrifice revenue in order to hold onto market share, he said.
"As mobile prices decline, [vendors] have to push desktop prices even lower. There's increasing mobile for desktop substitution, but it's not happening fast enough to aid the overall industry," Shiffler said.
Gartner believes worldwide PC revenue will actually decline slightly in 2006, even though shipments are expected to grow 10.5 percent.