The personal computer market is in trouble, and four of America's top five PC manufacturers are showing signs of distress. Gateway has just announced the closure of its UK operation, and Compaq - which until this year was the world's biggest PC supplier - may disappear completely, if it is taken over by rival Hewlett-Packard, as announced last week.
But not all the problems are due to the downturn in the economy or the bursting of the internet bubble. Much of the suffering has been caused by Dell Computer, which started a price war to gain market share.
According to Gartner Dataquest's figures for this year's second quarter, PC sales slipped by 1.9% - "the first negative growth rate since 1986" - but Dell increased its shipments from 3.3m to 4.0m units. As a result, Dell gained 20.2% in market share, while Compaq lost 14.4%, HP lost 8.5%, and IBM lost 6.9%. One result is the HP-Compaq deal, but this is not the only sign of trouble.
IBM, which launched the IBM PC 20 years ago and was the largest PC manufacturer until 1994, has already retreated from its losses in the retail PC market to concentrate on direct sales and its profitable ThinkPad notebooks. Gateway, which used to be the biggest direct supplier in the US, is withdrawing from the UK, Ireland - where it has a factory - south eastern Europe and Africa, and is now talking to employees in France.
All this will have an impact on the high street. British buyers who used to be able to choose machines from Compaq, Gateway (which had its own shops), HP and IBM could find their choice of top American brands reduced to one: HPaq. Things could be even worse in the USA, where HP and Compaq have more than 80% of the retail market, according to figures from the research company, NPD Intelect.
But it won't all be bad news. Smaller British and European PC manufacturers could benefit from the thrashing Dell is giving its main rivals. Bob Garrett, marketing director at the computer suppliers Evesham.com, says staff have already been approached by companies looking for alternative sources. "Customers are beginning to think that if the US brands are not as committed to Europe as we thought, then maybe we shouldn't be as committed to them," he says.
Andrew Walwyn, managing director of Tiny Computers, says: "I never wish for people to lose their jobs, but the market is up for grabs, and that is good news. I think there is opportunity at any time and in any climate: it's the people who seize that opportunity who come out on top." Tiny followed Dell in cutting prices, and Walwyn says that while Michael Dell "was the person who led the initiative, we both gained market share".
Like Gateway, Tiny is retrenching. It is closing its stores in the US and moving manufacturing from China to Scotland. Although labour is more expensive, it saves a lot on airfreight.
Still, everyone knows that the PC industry's best days have gone. Companies such as Compaq, Dell and HP used to be able to charge $1,500 to £2,500 for PCs and still see sales grow by 30-40% a year. Now, most people who want a PC already have one, and it is tougher to sell to a replacement market. Because unit prices have tumbled to £500-£1,000, suppliers have to shift at least twice as many machines to achieve the same turnover, with the extra marketing costs coming out of thinner margins.
And because almost anybody can start a PC manufacturing business in their back yard, using the same components as brand name machines, the big brands do not command the premium prices they used to.
It was glorious while it lasted. Compaq, founded in 1982, was the first American company to make more than $100m in sales in its first year. Last year its turnover reached $42.4bn, earning it 27th place on Fortune magazine's list of America's 500 largest corporations - ahead of Procter & Gamble, Intel, Safeway, Walt Disney, Microsoft, Coca-Cola and many other well-known names. Not bad for something that started with a thumbnail sketch on a paper placemat from a Houston restaurant.
But it may be a case of "live fast, die young". Carleton (Carly) Fiorina, HP's chairman and chief executive, was last week talking of using the HP brand rather than Compaq, though some product names could survive the takeover. The pioneer of what we used to call IBM PC-compatible computing could disappear before its 20th birthday.
But consolidating their PC operations is not what the deal is about. According to a memo Fiorina sent HP staff announcing the takeover, it is part of an attempt to become the computer industry leader. "For the first time in a long time, IBM will have a competitor that's strong enough, bold enough, and talented enough to take them head-on in the enterprise space."
The fact is that although Microsoft and Intel get most of the publicity, IBM is still bigger than both of them put together, and since the 1930s has had a stranglehold on large-scale data processing. It may not be glamorous but it is the stuff that keeps the banks and financial services running, that keeps planes in the air, and delivers food to supermarkets. But having gone through problems of its own, IBM is less than half the size it expected to be. It no longer dwarfs its biggest competitors, and the combined HPaq would have an annual turnover of $87bn - within spitting distance of IBM's $90bn.
Eight years ago, when IBM hired an outsider, Lou Gerstner, to rescue the company, he did it by shifting the focus from sales to services. The idea was for IBM to take over as much of the job of running a big company's IT operations as it wants - to the extent that it will hire the company's IT staff and operate its computers for them, if necessary - in exchange for regular fees. Hardware, software, programming, maintenance, consultancy and even financing can all be part of the deal. Today, the services division provides about 40% of IBM's annual revenues.
It wasn't a new idea. Almost every large computer company has spent most of the past decade talking about getting into the enterprise services business, but with little of IBM's success. Compaq's moves in this direction included the $10bn takeover of Digital Equipment Corp, a pioneering minicomputer manufacturer, for its existing services business. This is the real prize for Digital's former rival, HP.
In Fiorina's words: "With more than 65,000 professionals around the globe in the new HP Services organisation, we want to be the partner of choice in architecting the enterprise. By combining forces, we become a top-tier services provider - offering a true choice in how large companies strategise and implement IT projects."
But from that point of view, Compaq is a poor substitute for the services company that Fiorina wanted, and failed to buy for $18bn last November: PricewaterhouseCoopers. Brian Gammage, a Gartner Group analyst, says: "PwC was complementary, but Compaq is one of the least complementary companies it could have bought. This is a defensive move by two struggling management teams." Not only do the two businesses overlap, of course, some of the overlapping parts use completely different ranges of hardware and software.
HP already has a "legacy" business of proprietary minicomputers and its own flavour of the Unix operating system. With Compaq it will get Digital's similar but incompatible legacy business based on VAX and PDP minicomputers, Digital's flavour of Unix, plus the different and incompatible Tandem minicomputer business that Compaq bought earlier.
Where Dell does everything with standard Intel Pentium or compatible processors, HPaq will be stuck with its own HP-PA Precision Architecture chips, Digital's Alpha, and Tandem's Mips, as well as Intel Pentium and StrongArm chips, and possibly others.
Previous computer industry mergers, such as Burroughs' takeover of Sperry to form Unisys (above), and Fujitsu's takeover of ICL and Amdahl, suggest that owning incompatible ranges is not a good idea.
And as analyst Martha Bennett, vice-president of Giga Information Group, points out, the merged company will still be dependent on its retail channels, not on services. On Fiorina's own figures, services will only bring in $15bn, which compares with $29bn from "access devices" (PCs, notebooks and handhelds), $23bn from IT infrastructure (servers, storage, software) and $20bn from imaging and printing.
In the long run, there should be savings from consolidating these overlapping businesses: Fiorina reckons on shedding 15,000 staff and cutting $2.4bn a year from overheads. But in the short term, Gammage thinks employees will be "significantly distracted by internal restructuring" and the resulting "attrition".
In other words, people will be watching their backs when they should be watching their competitors. That is not a good idea when the competition includes both Michael Dell and IBM.
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