PC industry faces 'upheaval', Gartner says

The lack of product differentiation and price competition has led to many PC suppliers operating at near-zero margins since 2001.

Although the annual PC shipment growth will average at 8 percent between 2006 to 2009, revenues are likely to remain flat, says Gartner.

According to the research firm, many PC vendors have been operating at near-zero margins since 2001.

Their problems stem from an inability to differentiate their product offerings, other than by offering more competitive price points, Garter said.

Improvements in hardware performance have also outstripped computing requirements of mainstream applications, hence allowing users to buy cheaper and more basic machines, noted the analyst. This further drove down the margins of PC vendors.

"The growing gap between realistic levels of profitability and shareholder expectations will intensify pressure on PC vendors registered in the United States, Japan and Europe, ," said Brian Gammage, vice president at Gartner. This opens up the market for emerging vendors that have lower labor costs, and more modest margin objectives, he added.

According to Gartner, only Microsoft and Intel have managed to buck the trend, maintaining their per-PC revenues at near constant levels over the last two to three years.

However, Gartner expects Microsoft and Intel to also come under increasing pressure to innovate in order to maintain market growth and profitability from PCs.

"The key question for the industry is when and how quickly these changes will occur," said Gammage. "Initially, the changes will be gradual, but are likely to see rapid acceleration as the industry trades volume for margin. Such acceleration could be precipitated by macroeconomic conditions, or a further slowdown in replacement buying."

He noted that while the PC industry is going through this "upheaval", the development of PC virtualization will create extra risks for the suppliers of personal computer unless a broadly supported standard is established. With the ability to decouple hardware from software, PC virtualization technology has the potential to be highly disruptive as it makes different hardware computers look identical to software, according to Gartner.

"If the suppliers driving these developments cannot agree quickly on (industry) standards, the introduction of hardware-based virtualization will add to the challenges for PC manufacturers," Gammage warned. "(Manufacturers) are cautious about embracing innovation and cannot afford to back the wrong implementation."

Gartner believes PC virtualization is a key component in driving innovation across the industry.