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Microsoft, Intel Losing Grip on PC World

While federal regulators busy Microsoft and Intel with antitrust charges, personal computer makers--long bound by their dominance of the industry--are peeling away from the "Wintel" duo.

PC makers have announced a series of key moves to cash in on the growth of the Internet, differentiate their PCs, cut chip costs and, perhaps most important, to wrest some power from Microsoft, which supplies the PC operating system software.

Among the key moves:

  • This week, Compaq Computer said it will sell home PCs this fall that have four keyboard buttons to quickly take users to Internet portal sites, such as Yahoo, online stores, search services and electronic mail--bypassing Microsoft's control of the Windows desktop.
  • Packard Bell-NEC announced it will offer PCs that have screen icons, placed outside Microsoft's Windows desktop screen and thus outside of Microsoft's control, that link users to Internet sites, including online stores.
  • Gateway recently won Microsoft's approval to direct customers to Gateway's Internet service provider (ISP) as opposed to those sanctioned by Microsoft. That means more revenue for Gateway. Compaq, in partnership with GTE, will do the same on Presario PCs; Dell Computer expects to tout its own group of ISPs in upcoming PCs, CEO Michael Dell says. IBM and Packard Bell-NEC already do.

Bucking Intel's stronghold, half of the 10 major PC makers now use lower-cost chips from Intel rivals in some PCs. Intel's market share, which peaked last summer at 86%, will drop to 80% at year's end, predicts Microprocessor Report's Linley Gwennap. The non-Intel chips don't allow PC makers to differentiate their products. But they do loosen Intel's grip on the industry and spur price competition.

All those efforts by the PC makers are designed to offset declining PC prices, slowing growth and shrinking margins. Of vital importance to PC makers is finding a way to cash in on the growth of the digital economy--the buying of goods and services over the Internet. That is projected to be a $300 billion market by 2002 as the number of Net transactions doubles every 100 days.

So far, PC makers have done little more than supply the PC boxes consumers use to access the digital economy. Some, led by Dell and Micron Electronics, sell tens of thousands of PCs over the Net. Others use the Net to help customers with technical support. But such efforts pale in comparison to Internet content companies, such as Yahoo and Excite, which are luring millions of people to advertising-sponsored Net sites that offer online shopping, news, electronic mail, search and other services. Wall Street is so enamored of the potential for Internet portals that Yahoo, with $67 million in 1997 revenue, has a market value similar to Dell, which had 13 times more revenue.

PC makers have to make changes. They recently got a grave reminder that competing on price alone is a tough business. In the past two years, the average price of a PC sold at retail has dropped 31%, ZD Market Research says. Compaq, Hewlett-Packard and IBM all cited PC price wars as a drag on first-quarter earnings. The No. 1 PC maker, Compaq, will see gross margins of 21.6% this year, down from 27.5% last year, BancAmerica Robertson Stephens says.

Slowing growth rates add to the pressure. PC sales will grow worldwide by 9% in the second quarter, down from 10% in the first quarter and 15% for all of last year, research firm International Data says.

Yet PC makers have had little choice but to compete on price, especially in the consumer market. Because Microsoft provides the Windows operating system--the basic guts of the PC--for at least 90% of new personal computers, and Intel provides the chips that power them, PCs are very similar. "Some PC makers are in a horrible situation. They cannot innovate and they cannot differentiate their products," says Doug Johns, CEO of PC maker Monorail.

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