Dell Computer Corporation

Market Conditions in the PC Industry in 2000

At the same time, forecasters expected demand for high-end servers carrying price tags of $5,000 to over $100,000 to continue to be especially strong because of the rush of companies all across the world to expand their Internet and e-commerce presence. Full global build-out of the Internet was expected to entail installing millions of high-speed servers.

Declining PC Prices and Intense Competition

Sharp drops in the prices of a number of PC components (chiefly, disk drives, memory chips, and microprocessors) starting in late 1997 had allowed PC makers to dramatically lower PC prices—sales of PCs priced under $1,500 were booming by early 1998. Compaq, IBM, Hewlett-Packard, and several other PC makers began marketing sub-$1,000 PCs in late 1997. In December 1997, the average purchase price of a desktop computer fell below $1,300 for the first time. It was estimated that about half of all PCs sold in 1998 were computers carrying price tags under $1,500; by 1999, close to half of all PCs sold were units under $1,000. Growth in unit volume was being driven largely by sub-$1,000 PCs. The low prices were attracting first-time buyers into the market and were also causing second- and third-time PC buyers looking to upgrade to more powerful PCs to forgo top-of-the-line machines priced in the traditional $2,000–$3,500 range in favor of lower-priced PCs that were almost as powerful and well-equipped. Powerful, multifeatured notebook computers that had formerly sold for $4,000 to $6,500 in November 1997 were selling for $1,500 to $3,500 in December 1999. The profits at Compaq, IBM, and several other PC makers began sliding in early 1998 and continued under pressure in 1999. Declining PC prices and mounting losses in PCs prompted IBM to withdraw from selling desktop PCs in 1999.

However, unexpected shortages of certain key components (namely, memory chips and screens for notebook computers) drove up prices for these items in late 1999 and moderated the decline in PC prices somewhat. But the shortages were expected to last only until suppliers could gear up production levels.

Continuing Economic Problems in Parts of Asia

Economic woes in a number of Asian countries (most notably, Japan, South Korea, Thailand, Indonesia, and to some extent, China) had put a damper on PC sales in Asia starting in 1997 and continuing through much of 1999. Asian sales of PCs in 1998 grew minimally (though sales were fairly robust in China); sales improved in 1999 but remained depressed in Thailand, Indonesia, and several other countries. China began experiencing some economic problems in 1999. In addition, sharp appreciation of the U.S. dollar against Asian currencies had made U.S.-produced PCs more expensive in terms of local currency to Asian buyers. In contrast, sales growth in the United States and Europe in 1999 remained strong, despite all the Y2K fears, mainly because of lower PC prices.

Disk-drive manufacturers and the makers of printed circuit boards, many of which were in Asia, were feeling the pressures of declining prices and skimpy profit margins. Industry observers were predicting that competitive conditions in the Asia-Pacific PC market favored growing market shares by the top four or five players and the likely exit of PC makers that could not compete profitably.

While few industry observers doubted the long-term market potential for PC sales, there were several troubling signs on the near-term horizon, along with differences of opinion about just how fast the market for PCs would grow. A number of industry observers were warning of a global slowdown in the sales of PCs in 2000 and beyond, partly due to the economic difficulties in several Asian countries and partly due to approaching market maturity for PCs in the United States, Japan, and parts of Europe. Consequently, some analysts were forecasting gradual slowing of the industry growth rates from the 20–25 percent levels that characterized the 1990s down to the 10–12 percent range by 2005. However, U.S. shipments of PCs in the 1997–99 period had grown 20–25 percent annually, a much higher rate than most industry analysts had expected. Some 45 million new PCs were sold in the United States alone in 1999. Sales of servers, along with low-end PCs and workstations, were the fastest-growing segments of the PC industry in 1999 and were expected to be the segment growth leaders in 2000 and beyond.

On the positive side, some analysts expected that worldwide computer hardware sales in 2000–2003 period would grow at a compound annual rate of 15 to 20 percent, following cautious corporate buying in the second half of 1999 in preparation for meeting Y2K deadlines. Their expectations for 15–20 percent growth were based on (1) the introductions of Windows 2000 and Intel’s new 64-bit Itanium microprocessors, (2) rapidly widening corporate use of the Internet and e-commerce technologies, (3) wider availability of high-speed Internet access, and (4) growing home use of PCs—as first-time purchasers succumbed to the lure of reasonably equipped sub-$1,000 PCs and as more parents purchased additional computers for use by their children. The three most influential factors in home ownership of PCs were education, income, and the presence of children in the household.

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