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PC makers already dreaming of a profitable Christmas

The Christmas holiday shopping season is still months away, but most of the major players in the personal computer industry are gearing up for a make-or-break sales blitz.

No matter how you slice it, the PC business is in a steeped battle for survival. The recently completed merger between Hewlett-Packard (NYSE: HPQ) and Compaq Computers, price slashing by Gateway (NYSE: GTW) and aggressive marketing by Dell Computer (Nasdaq: DELL) are just the first shots in the battle for a profitable piece of the PC market.

For an industry that is perceived to be in total disarray, things aren't really all that bad. The good news is that the number of personal computers in use around the world topped 600,000 in 2001. And, that number is expected to double in the next six years. The bad news is the industry could be approaching maximum capacity.

"PCs in use will approach saturation in the U.S. soon after 2010," said Dr. Egil Juliussen, the author of a study on the industry for Computer Industry Almanac. "Despite approaching saturation, annual PC sales in the U.S. will be in the range of 60,000 after 2010 due to replacement sales every five years for most PC users," he said.

The quest for customer loyalty is the reason the battle for market share is so heated. Dell continues to hold a substantial lead in that category over its closest competitors. In the first quarter of 2002, Dell accounted for 28.4 percent of the PCs shipped in the United States, according to industry trends company IDC. That's up from 23.7 percent in the same period a year earlier. Hewlett-Packard and Compaq combined accounted for 22.3 percent and they were followed by Gateway at 6.1 percent and IBM with 5.4 percent.

Like the rest of the worldwide economy, the PC industry went into a nosedive following the terrorist attacks of September. However, the latest numbers from IDC show a slowly improving marketplace. While global PC sales were down 2.7 percent in the first quarter, there was little change in the number of units shipped in the United States.

"The good news is that the market is no longer contracting rapidly," said Loren Loverde, director of IDC's Worldwide Quarterly PC Tracker. "Nevertheless, we have yet to see key segments return to significant growth. Emerging markets are struggling to maintain positive growth, the commercial segment continues to invest cautiously, and consumers will not come back into the market in force until later this year."

Gateway is getting ready for the return of the personal computer shopper by slashing prices in an effort to gain back some lost market share. The Poway-based company saw its piece of the market by nearly 30 percent.

Like many other companies, Gateway is walking the fine line between building market share and trying to achieve profitability. The company shut down most of its international operations and has focused on domestic retail sales.

"By offering significant value at every price point, we took market share in the first quarter, and we don't intend to let up," said CEO and founder Ted Waitt. "With our costs in line, Gateway now is successfully executing an aggressive growth strategy that's driven by industry-leading products, outstanding customer value and service, and the expansion of our digital solutions business."

Although Gateway has taken steps to improve its bottom line, there are still concerns about the company's financial viability. Last week, Moody's Investor Services cut Gateway's debt rating for the third time in nine months, saying that the company will have a hard time boosting sales and market share while it tries to cut costs and sustain profitability.

Gateway has taken steps to position the company to benefit from a significant change in the computer industry: the shift from desktop computers to notebook products. NPD Techworld reports that notebook unit sales rose by 32 percent in March compared to the same month a year earlier. At the same time, desktop unit sales fell by 17.5 percent during the same period.

"Mobile computer users are now using their portables for applications once reserved for the desktop such as burning audio CDs, gaming and digital imaging," said Gateway's Mike Stinson, vice president of mobile products. In April, Gateway introduced six new notebook products that range in price from $1,499 to $2,499. Of course, the growth in the notebook segment is attracting competition from every player in the industry, including low-priced products from Sony and Toshiba.

So, while competitors try to find a way to attract customers, Dell Computer -- the industry's 800-pound gorilla -- continues to profit from its successful direct marketing sales program.

In response to the heated battles surrounding the Hewlett-Packard and Compaq merger, CEO Michael Dell said rather smugly, "We're very much relying on gaining market share."

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Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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