PCs fall off Santa's list

Nearly every Christmas since 1996, consumers have crowded electronics stores and shopping centers to stock up on new personal computers at ever-lower prices. But this year there won't be a PC under the tree for lots of people, including Margaret Francis. The Fort Worth, Texas, retiree says she would rather have a new digital camera to use with her 5-year-old Compaq PC.

The reason? "I can do everything I want it to" with the existing machine -- including sending digital photos via e-mail, Francis says.

For home-PC makers, such thinking is casting a pall over the industry's most important season. Early results from retailers say consumers are moving on to other electronics items, even though PC makers have spent millions of dollars to promote the idea that faster and better PCs are the key to getting the most out of digital cameras, camcorders, and stereo receivers.

Despite aggressive pricing and rebates, PC sales in the first two weeks of November slumped 8 percent compared with last year. October sales fell at a double-digit rate, according to home-PC market watchers PC Data Inc. and NPD Intelect Inc.

It's still early in the holiday shopping season, of course. But major retailers such as Best Buy Co. and Circuit City Stores Inc. already have lowered their forecasts, citing price cuts on a range of products, including computers. Late Wednesday, Gateway Inc. became the first major home-PC maker to warn that Christmas sales so far have been much weaker than expected, a shocking announcement that it said will damage its revenue and profit.

Gateway said its consumer sales around the globe have slowed sharply and suddenly. Gateway Chief Executive Jeffrey Weitzen says the company believes the slowdown will affect other PC makers. "We've got a softening economy and a fair amount of uncertainty around the economy" that has traditional PC buyers fleeing to lower-priced goods this Christmas, he says.

Stephen Baker, an analyst at PC Data of Reston, Va., says there aren't many strong incentives right now for consumers to buy a new PC, such as a major new operating system from Microsoft Corp., or a new processor chip that drastically boosts a computer's performance. "There doesn't seem to be any momentum to kick up demand," he says. "So many families have a PC now that what people are looking for are the things that surround it," such as scanners, MP3 music players, and compact disk burners.

Baker says the slowdown is accentuated by what should have been easy comparisons for the industry. Last year's fourth quarter was hurt by a huge, midyear buying spree as consumers flocked to take advantage of $400 rebates on PCs given when the purchaser also signed up for Internet access.

Prices are falling by 3 percent to 4 percent a quarter, considered stable compared with years when prices fell 15 percent to 17 percent a quarter. PCs without a monitor sell for an average of $870, according to PC Data. "I haven't seen any run-out-and-get-this pricing yet," says Baker. "Six weeks ago, I'd have said this would be a very good Christmas. Between the economy starting to slow down and the election uncertainty, people seem to be pretty nervous."

Gateway isn't preparing to slash prices to accelerate sales, Weitzen says. Historically, PC makers have used price cuts to bring new buyers into the market during slowdowns. However, he says, lower prices haven't boosted sales this year as much as in previous slumps.

Gateway's shocker suggests that the industry may no longer expect new buyers to drive consumer PC sales. Indeed, last year the industry passed a milestone -- more than half of U.S. homes own at least one PC, limiting the potential pool of first-time buyers.

Now market researcher International Data Corp. says it expects PC penetration into U.S. homes to just inch up to 52 percent of all households. "Is that big wave over? I'd say it is," says IDC analyst Roger Kay. "Consumer PCs are a very discretionary purchase. If you're looking to cut back, it's one of the first places to look."

Though softer, PC sales aren't falling. U.S. home PC sales should rise 24 percent to 21.5 million units this year, according to IDC. While the company says it is considering lowering its estimate slightly, it still expects sales to rise by about 4.2 million units from 1999, when Internet-access rebates drove unit sales up 43 percent.

Some consumers are buying new machines because they no longer can hold off. Edward Clough, a Haverhill, Mass., marketing manager, just spent $1,500 on a Dell Computer Corp. PC to get faster Internet access. He recently signed up for a digital subscriber line phone service that allows the simultaneous use of the phone and high-speed Internet access.

But he discovered his 4-year-old PC wasn't up to the job. "My current machine couldn't handle the software" needed for the DSL Internet service, Clough says, so he went shopping.

The softening economy isn't the only threat to the industry. PC makers have yet to feel the full impact of low-cost "information appliances" that are used to access the Internet. These $399 to $599 Web cruisers only recently were introduced by Compaq Computer Corp., eMachines Inc., and Gateway. Analysts say that once they become widespread, they should put further pressure on PC sales.