Pricing wars between large PC manufacturers and clones or alternative machines, along with a decrease in demand by consumers, has hit the industry right where it lives ... and derives most of its profits. So what will IBM, Compaq, Dell and Gateway do now that the luster of buying a PC has worn off?
Get into the service business, naturally. Although it deals in software and not hardware, Microsoft recognized the need to transition to services with its new .NET strategy, and now hardware vendors are having to address similar potential profit centers.
At a recent trade show, for example, Compaq began to show customer-oriented devices like an MP3 player and a pager. When investors questioned the thin margin derived from products like these, Compaq responded by saying that the devices integrate with company partner service offerings, thereby creating some kind of revenue stream along the way.
Gateway is an example of one PC manufacturer that began to figure out early-on that it needed to change the traditional revenue model. It began pushing leases rather than purchase plans, and in the second quarter of 2000 alone, realized a 23 percent increase in gross margins.