September 25, 2009 / 11:36 AM / 8 years ago

COLUMN - The financial paradox of PC unit growth: Eric Auchard

-- Eric Auchard is a Reuters columnist. The opinions expressed are his own --

By Eric Auchard

LONDON (Reuters) - Depending on what measures you use, the personal computer industry either is on the cusp of another Golden Age or in a downward spiral. From a financial point of view, the latter is more accurate.

Sector enthusiasts point to PC sales by volume bottoming out this month or next after a steep, year-long downturn. Gartner Inc this week revised its 2009 PC shipment forecast to 285 million units, an annual decline of 2 percent. That’s a big improvement over the research group’s gloomy January prediction of a 12 percent drop.

The October launch of Microsoft’s Windows 7 operating system could spur many buyers to replace aging PCs. Now Wall Street has become increasingly bullish on PC stocks it believes will benefit from a surge in corporate orders that has not been seen since the industry’s glory days in the 1990s.

But growth in unit sales cannot disguise shrivelling revenues brought on by plunging prices.

Hewlett-Packard Co illustrates this paradox. HP’s Personal Systems division, which accounts for a third of its sales, enjoyed a 2 percent rise in unit sales in the three months to the end of July as it gained market share on its closest rival, Dell Inc.

Nevertheless, the division’s revenues dropped 18 percent year-to-year. Margins fell by one-third to 4.6 percent of revenue. The economy is only partly to blame for this decline. Its PC business is increasingly a prop to sell other hardware, software and services.

JPMorgan analyst Mark Moskowitz estimates that revenues for the PC market in 2011 will only barely be at 2007 levels, even though the industry will sell 100 million more units. This is largely down to the popularity of ultra low-cost netbooks. Sanford C. Bernstein estimates that netbooks can probably serve the needs of at least 50 percent of PC users, undercutting the need for more expensive machines.

The basic math is that two netbooks must be sold to produce the same revenue as a single laptop. Collapsing average selling prices for netbooks is disrupting the cozy old relationships that once tied PC makers to chip supplier Intel Corp and software maker Microsoft Corp.

Desperate to preserve profit margins, many PC makers are experimenting with free software and also alternative microprocessors from alternative suppliers such as AMD or ARM. Even if they preserve margins, the pool of profits is shrinking, forcing computer makers to expand outside of PCs. These deflationary trends are only likely to accelerate in coming years.

We increasingly think of computers in terms of the tasks they perform, rather than as boxes. Instead, the value in technology has shifted into networks, software, storage and semiconductors. More people already reach the internet on phones than on PCs.

Intel, the maker of the microprocessor chips that serve as the brains of most PCs, acknowledged that reality this week when it said it was expanding efforts in other markets to offset its maturing PC business. These include phones, software, industrial electronics and consumer gadgets.

Computers are everywhere these days, in all kinds of products from cars to refrigerators to phones to TVs. But they are increasingly invisible commodities. As such, the days of the computer box industry are ending, whatever the latest PC shipment figures say.

-- At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund --

(Editing by Martin Langfield)

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