CES Countdown #11: Are the desktop PC's days waning?

CES 13 Coundown banner (300px)Is there anyone you know whose holiday wish list includes a computer weighted down, by design, to his desk? Lack of portability may be becoming a real liability for the desktop PC, but that doesn't mean it'll disappear anytime soon.

It should come as no shock to anyone that general demand among consumers for the desktop PC form factor is at its lowest point in years. The exceptions are at the very bottom of the value chain; but even there, as notebook PCs start to make a respectable value proposition for themselves at $500 and under, it's more and more difficult for their desk-bound competition to compare.

The transition of the consumer market -- or, more accurately, the completion of the ongoing transition -- to one in which the mobile platforms take precedent, may not have to be a painful one. The problem is, entire segments of the component manufacturing industry depend on sustained demand from consumers:

  • The world's two principal CPU manufacturers, most notably, continue to base their design strategies around three-pronged attacks: desktop, mobile, and server. Ramping down the desktop segment could cost AMD and Intel money; both would be better off if demand for desktop CPUs were reasonably sustained, or at least permitted to subside slowly.
  • Hard drive manufacturers still rely on the classic 3.5-inch form factor. Companies like Seagate have managed to keep that part of the business afloat, but according to its last quarterly report in late October, it only did so by virtue of a tactic of shifting sales to third-world nations where demand for inexpensive computers is high, and reducing margins for resale to the value segment. Seagate might like for this lower-margin side of its business to be outmoded into history, but then what would it do with about 40% of its production?
  • Video card manufacturers (even the one that's owned by a CPU maker) are faced with the prospects of diversifying their customer base beyond their traditional enthusiasts, in order just to survive 2009. Two weeks ago in its quarterly report, Nvidia revealed lower revenue from the desktop CPU side of its business by a staggering 42% over the same quarter in 2007. The reason why was explained by the very best semiconductor analyst working today, Mercury Research's Dean McCarron: significantly lower desktop PC demand. By contrast, Nvidia's revenue from notebook GPUs declined only 2% for the quarter, but that's in a business where margins are already tightest. Suddenly those hybrid GPU/CPU "fusion" projects don't look like they should remain on the back burner.

No one could explain the problem that reduced desktop demand represents than the authors of Nvidia's last quarterly report. Assuming this problem isn't rectified soon, the report says, the company would normally have to spend research money on working on alternatives. In this economy, it may not have that money.

But then, there's also a sort of "tsunami effect" -- the wave that comes after the impact. As the report explains, "Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results."

Who would that hurt, and when? Well, the wave would come back and hit the PC manufacturers themselves, as Dell explained in its last quarterly report: "Our manufacturing and supply chain efficiencies give us the ability to operate with reduced levels of component and finished goods inventories. Our financial success is partly due to our supply chain management practices, including our ability to achieve rapid inventory turns. Because we maintain minimal levels of component and product inventories, a disruption in component or product availability could harm our financial performance and our ability to satisfy customer needs."

Dell has always operated with a minimum inventory level -- which is part of the business model CEO and founder Michael Dell originated. Right now, it continues to keep eight days of inventory on hand -- this while competitors talk about having four or five weeks' inventory on hand. Conceivably, Dell should be hurt least by an availability situation; but on the other hand, as demand for desktop PCs fall, the manufacturer from whom parts makers would feel the pain first, is Dell.

And how bad can it get? In its last quarter ending in October, Dell reported US revenues from desktop computer sales fell by 14% over the year-ago quarter. Keep in mind, that's the end of October. Up until the beginning of September, the worldwide PC market as a whole was on course for a growth rate of about 12%, perhaps as much as 14% -- with notebooks somewhat higher, and desktops somewhat lower. In just two months' time, the decline in demand pushed Dell's desktop revenues that much lower, with the rest of the industry right in line.

Next: The alternatives to ramping down, if there are any...

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