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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