'Strong price competition among retailers, as well as in the professional space, clearly boosted the main European PC markets,' says Karine Paoli, EMEA senior analyst at IDC. 'However, it also strongly affected margins and value growth. Attractive desktop offers and brand competition will continue to sustain high levels of demand for PCs, but as the average price of PC servers also declines due to a push at the low end, the market value growth outlook remains questionable.'
In other words, the market could even shrink in value terms over the next few quarters. There is next to no profit in the desktop PC business. Even so, many vendors remain optimistic - at least publicly - and dealers still see ways to make money from desktops (see the vendor and reseller viewpoints on pages 45 and 56 respectively).
It has certainly been a difficult time for vendors and Kevin Knox, senior research analyst at Gartner Group, believes it will get worse before it gets better. The large PC vendors have shareholders and an impatient Wall Street to appease, which is difficult in a market already more or less at a commodity stage and where revenue growth is under serious pressure. 'The main problem faced by the larger vendors is that they need to sell more PCs with higher specifications to stay in the game,' he says. 'However, this is becoming increasingly difficult because of the changing dynamics of the market.'
According to one distributor's estimate, margin erosion is so bad that it's necessary to do about 40 per cent more volume just to stand still in the PC business. A reluctance in the corporate market to renew PCs as often as vendors would like is compounding the problem: 'The vendors are trying to shorten the length of the PC's life cycle to push users into renewing their hardware every two years or so. In real terms, however, PCs are living longer, as users try to lengthen those same life cycles and make their budgets stretch that bit further. The current lack of a killer application is exacerbating the situation still further. There is no resource-intensive application at the moment to force users to upgrade. They see no reason to move to a higher spec machine when the one they have runs their applications perfectly well.'
Windows 2000 won't come quickly enough for most vendors, which are hoping the release will give the PC market a much needed boost. But that can't be relied upon and the vendors know it. Faster time to market and lowest possible delivery costs are what vendors need and the question is, do they follow Dell and go direct or try to streamline their channel models?
Vendors that have traditionally taken the indirect route are under pressure. Knox says they are looking to redefine themselves for the next century as more rounded, multi-faceted organisations with several routes to market.
'There is no question that the big three - Hewlett Packard, Compaq and IBM - are manoeuvring themselves towards more direct routes to market, adopting more direct sales models,' says Knox. 'Quite simply, this is because they realise that the costs associated with the indirect model, such as inventory, reseller recruitment and price protection, are prohibitive.
'Additionally, vendors know they will need better routes to market to compete with the direct vendors and protect their respective market shares. Another reason is that they have finally recognised the need to improve their customer relations and realised how they are perceived by users.'
Whether the key vendors go direct remains to be seen. Other commentators believe it would be a mistake for Compaq, IBM and Dell's rivals to go direct and that the channel remains the best and most cost-effective delivery method. Others believe it would be a mistake for them to adopt hybrid models that mix the two routes. For resellers, it may not matter much anyway - they have already had to stop relying on PC sales and move towards services.
Any significant shift by the vendors towards more direct routes will have an impact on the channel. Knox believes there will be a massive shakeout in the channel over the next two or three years. 'Between now and about 2003, we are going to see a high level of acquisition and consolidation among smaller vendors and resellers as the dead wood is cleared out. The resellers most likely to survive this period of flux will be those that can quickly turn their businesses from being product and procurement-focused to being completely service-centric,' he says.
'Over the next few years, resellers will need to ensure that their revenue is reliant not on product sales, but on their ability to provide expertise and high-quality services to users. If they don't have that ability, they will struggle to stay afloat in what is going to be a fast-consolidating area.'
That's a reality most resellers have been aware of for some time. If they have already made the transition, there is every reason to be optimistic, says Stephen Timms, senior analyst for services at Romtec. He says the desktop services market - including areas such as maintenance, helpdesk, training and any other services needed to support the desktop user - is growing at 14 per cent this year in revenue terms.
But vendors are also trying to move into this area. 'This is not a new market and it has already been key to the survival of some resellers,' says Timms. 'But vendors are moving into services now and there is potential for conflict. This is something the vendors will have to manage carefully. Resellers will need to specialise in certain areas and become niche, but that has been happening for ages.'
Observers agree that vendors must be careful about moving into reseller territory. Knox doesn't believe that vendors can afford to take all the business away from the channel. 'Even the larger vendors don't have the internal logistic resource bases and organisational infrastructures to cope with going direct on their own. If the vendors are to make a success of their respective direct models, they will need the help of their incumbent channel partners for both product and service fulfilment, so it doesn't make sense to alienate resellers.'
According to IDC, PC sales rose by 20.3 per cent in the first quarter of this year compared with the same period in 1998. The UK is doing as well as any other country and the research company puts this down to a strong consumer market. Channel commentators also say the millennium bug, combined with the need to upgrade, has contributed to strong demand and will continue to fuel PC sales throughout the year.
But don't take that for granted - others say the first-quarter figures are distorted by vendors off-loading products into the channel and that sales to users have not been as good. As a result, there may be an impact on pricing later in the second and third quarters.
Dave Cheetham, business manager for professional PCs at Siemens, says: 'I am quite surprised by some of the figures and the growth we have seen in the first quarter. I think the figures are badly distorted because there is a lot of product in the channel. If you take that out, the growth of some vendors might look very different.'
The vendors may have shipped a lot of units, but have the dealers been able to sell them?
Cheetham thinks not and says this could rebound on the vendors in the second and third quarters, depressing street prices and vendor shipments. There is a general slowdown in buying, he says, and one of the factors is year 2000.
But Knox thinks the millennium issue could be a red herring. 'I don't think any slowdown caused by the year 2000 is going to be significant or lasting. Recent Gartner research into buying habits suggested that desktop budgets will not be cut to any great degree in the run-up, nor will they be adversely affected in any other way.'
One thing that looks certain is that competition won't die down - too much is at stake. According to IDC, total western European PC shipments were more than 6.5 million units this quarter, so the battle for volume will continue. Even if the average value of a PC is only £1,000, this makes it a £1,000 billion market, so from the vendor's view, the market is worth fighting for.
While the battle between Dell and Compaq is easy enough to understand, it must not be taken out of context. Dell is a long way behind Compaq in Europe, even though it is catching up fast in the UK. Compaq remains in charge across Europe as a whole, with an 18.5 per cent market share in western Europe. And Compaq's PC shipments increased by 26 per cent in the past year - comfortably above the market growth and suggesting, especially looking at the figures for companies outside the top five, that the leading brands are continuing to erode the market share of the smaller vendors.
IBM just held on to second place in the market, according to IDC. It increased its PC shipments by 31.6 per cent over the EMEA region, gaining a percentage share in the process. But IDC also points out that Dell is closing the gap and has already taken the number two slot in the desktop-only sector.
Although HP appears to have done badly this time, IDC says the vendor had a very strong first quarter in 1998, when it experienced 68 per cent unit growth. But with only a six per cent share of the market, HP must be favourite among the main brands to consolidate and focus on niche areas.
Siemens does not appear in the IDC charts, but it is number one in Germany and probably number five in desktops only across Europe. It is continuing to gain favour in other countries as well and sales in the UK are improving. Siemens says sales are rising by more than 60 per cent here and it is breaking into the top 10.
Another vendor using Germany as a springboard is Fujitsu. The vendor experienced a 46 per cent rise in unit shipments in the first quarter of this year, mainly attributable to its success in Germany and to an aggressive push into the consumer desktop market.
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