Kenneth N. Gilpin: Do we really need all the personal computer manufacturers?
Kimberly Alexy: There are 20 to 30 players comfortably in the business, and the top three have less than 35 percent of the market.
The market could use some consolidation. But there is no reason one manufacturer should buy another. Instead, over the last decade, selected vendors have withdrawn from the business. Earlier this year, for example, Gateway just stopped its overseas business.
Going forward, we will see more companies downsize or rationalize their business, but won't outright exit the business. IBM, for example, has been selectively downsizing its operations, withdrawing from the consumer personal computer business. They have not been terribly aggressive.
Gilpin: The founding families of Hewlett-Packard aren't thrilled with the Compaq Computer merger. Do you share their lack of enthusiasm?
Alexy: A combination of Compaq and Hewlett-Packard doesn't make any sense at all.
Hewlett-Packard has a great printer business. It would make sense for them to either emphasize that business or do things that build on it, or extend out into storage and services. Those are the things Hewlett-Packard needs. With Compaq, they are buying a huge personal computer platform.
Gilpin: It seems the last thing we need is more computers. Is this still a growth business?
Alexy: Roughly speaking, 65 percent to 70 percent of the personal computer market is commercial; the remaining 30 percent to 35 percent is consumer. Penetration rates in this country are around 55 percent, and much lower than that outside the US.
There is a lot of room for new business growth in the consumer market, less so in the commercial or business market.
But the issue is not growth. The issue is how you make money. Essentially, that comes down to business models.
Gilpin: What business model works for personal computers?
Alexy: The issue is inventory. In a business where prices fall 25 percent to 50 percent a year, every week a product is sitting on the shelves it is eroding into the vendor's profit margin.
Dell, which is building a box fresh and shipping it out the door to the customer, doesn't have inventory, and that is why they win. Compaq and Hewlett-Packard are the flip side. Both of those companies and most of the vendors have built channels to retailers, like Circuit City. Dell doesn't have a channel; they sell everything direct.
It sounds simple, but it is difficult to change business models. To do it, a company like Compaq would have to start from scratch and take three steps back to move forward. I don't know that they can do it.
Gilpin: Do you like any of the computer stocks?
Alexy: We like Dell Computer, and have a buy recommendation on the shares, and the stock is up more than 60 percent this year. We have not been recommending Apple Computer, but the stock has had a very good year. But they had a horrible year in 2000, and the stock sold down to very low levels. Then you have Compaq Computer, whose stock is down more than 35 percent, and Gateway Inc, which has fallen by more than 50 percent.
Gilpin: Years ago, Bill Gates said Microsoft would never get into the hardware business. But the X-Box is definitely hardware. Is it likely to be a viable competitor?
Alexy: I think the X-Box will be viable. It represents the convergence between personal computing technology and consumer electronics. Over time, in the consumer part of the market, the lines between the two will blur more and more.
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