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Friday, 8 December, 2000, 20:40 GMT
Behind the profit warnings
Apple i-macs
US computer sales have slowed dramatically
The world's stock markets have been rocked by a string of profit warnings from US high-tech giants.

Intel, Motorola, Apple Computers, Gateway, Hewlett-Packard and Nortel Networks are just some of the big names to have warned of tough times ahead over the past few weeks.

Profit warnings
Nov 30 - Gateway
Dec 3 - 3Com
Dec 6 - Apple
Dec 7 - Motorola
Dec 8 - Intel

Shares in Microsoft, already down by a third on last year, dipped further this week when analysts Goldman Sachs warned of lower sales, wiping $20bn off the company's market value.

The fierce downturn in PC and mobile handset sales has been blamed on a global economic slowdown - but another explanation is that the market has - for the moment - reached saturation point.

Scale of downturn

Not surprisingly, the computer industry favours the first explanation.

It's every place in the world and it's nearly every product we sell

Intel's chief financial officer Andy Bryant
Chip maker Intel's chief financial officer Andy Bryant says: "What we believe is happening is a worldwide economic slowdown.

"It's every place in the world and it's nearly every product we sell."

But the scale of the sales downturn - in what has traditionally been the strongest quarter of the year - has taken many observers by surprise.

According to figures released on Friday by analysts PC Data, unit sales in the US dropped between 12% and 15% year-on-year in November.

Technology analyst International Data Corp also lowered its forecast for fourth quarter worldwide PC sales, warning that economic worries would depress home PC sales for "three to four" quarters.

Interest rates

The PC market has always been cyclical - and closely linked to macroeconomic conditions.

There are clear signs that the US economy is slowing from the 5% growth rates seen in the Spring and this - combined with continued uncertainty over the US election - has put the brakes on corporate IT expansion.

US investors are pinning their hopes on the Federal Reserve, which some believe may cut interest rates in the New Year.

I think it is a much more mature market today. Also, there aren't any killer applications

Steve Milunovich, Merrill Lynch
Such a move - coupled with possible tax cuts by a future Bush administration - will, they hope, kick start sales and bring confidence flooding back to the sector.

But even the most optimistic estimates say revenues will not start to pick up until the second quarter of 2001 at the earliest.

Market saturation

A more deep-rooted concern is that the PC market has simply reached saturation point.

About 60% of US homes now have home computers and the appetite for upgrades is slowing.

Steve Milunovich, global technology strategist at investment bank Merrill Lynch, says: "I think it is a much more mature market today.

"Also, there aren't any killer applications. You know, we are all pretty happy with our PCs.

"Things like video conferencing are not here yet so there is no big need upgrade and, in businesses, we had a lot of upgrading in front of 2000."

The product cycle - the length of time it takes the average customer to replace their existing PC - is currently thought to stand at around three years.

The big fear is that the cycle will begin to lengthen as consumers turn their attentions to other, more compact devices.

Trend away from PCs

In the run-up to Christmas, the shops are full of other gadgets to tempt consumers, such as digital cameras and hand-held computers.

A new generation of mobile wireless gadgets looks set to storm the market.

"Increasingly, next year and going beyond, information appliances may start to crowd out PCs," Mr Milunovich added.

He said some boxmakers were already talking about the impact this new generation of devices - which often have wireless connections to PCs - will have on their business.

Mr Milunovich added: "I don't think it explains the fourth quarter, but it could (explain things) going forward."

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See also:

08 Dec 00 | Business
US unemployment rises
08 Dec 00 | Business
Intel, Microsoft hit by tech gloom
07 Dec 00 | Business
Motorola warns on profits
06 Dec 00 | Business
Apple halts stocks rally
04 Dec 00 | Business
3Com warns on profits
17 Oct 00 | Business
Intel, IBM post solid results
04 Oct 00 | Business
Dell warns on sales
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