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Three of top 10 PC vendors likely to exit PC business by 2007, says Gartner

The reason for Gartner’s prediction has to do with replacement cycles, said Leslie Fiering, research vice president for Gartner’s client platforms group. These days, most businesses keep their computers for four years before replacing them, but the cycle was thrown out of whack during the Y2K crisis. Companies ran out and replaced their systems, and it took some time for the replacement cycle to start up again. Although in recent years, the PC market has had double-digit shipment growth, it’s expected to drop down again to single digits in the coming years.

“As that fleet started to age, we started finally to see some replacement again. And that’s one of the things that has driven double-digit growth over the last six quarters. We believe that the replacement cycle has reached its peak and will start to decline, so that eventually we’ll return to single-digit growth,” Fiering said.

Between 2003 and 2005, it’s expected PC unit growth will increase by 11.3 per cent annually, whereas between 2006 and 2008, it’s expected it will only grow by 5.7 per cent, according to Gartner. PC revenue growth between 2003 and 2005 is expected to be 4.7 per cent annually, while revenue growth between 2006 and 2008 is expected to be two per cent.

With the decline, vendors will be scrambling for a much lower level of demand, which could potentially lead to price wars, Fiering said. In order to survive, vendors are going to have to figure out how to take as much as two per cent out of their operating expenses. However, some PC vendors are barely profitable as it is, so trying to reduce operating expenses even more could be catastrophic, she said.

While replacement cycles are cyclical, there are other factors that brought Gartner to its conclusion that three of the top 10 PC vendors are likely to exit the market by 2007. In addition to the expected lower demand in the future, the uncertainties of the global economy and the fact that the PC business has become so competitive that margins have become small, it can only lead to consolidation, Fiering said.

Exiting the market, however, doesn’t necessarily mean that a PC vendor will go out of business, even though that is one possibility, Fiering said.

“It’s also equally possible that these global vendors could basically narrow themselves and drop back to being regional players rather than global players. There could be mergers or acquisitions, as we saw with Gateway and eMachines, and Compaq and HP. We also could see spinoffs, so that IBM or HP could spin off their PC business, as we saw IBM do with the printer business to Lexmark,” Fiering said.

As it stands now, there is only one vendor that is well-positioned for the future, Fiering said. That vendor is Dell. However, Fiering said it’s possible for other vendors to take actions right now that could help them weather the future hardships of the PC business. For instance, Gateway is making major changes right now to improve its operating expenses, she said.

“Any one of the vendors could, in the next 18 months, really take proper steps to position themselves,” Fiering said.

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