Will PCs rebound? Doubt it, ha?

There were warnings more than a year ago, but few in the computer industry paid heed.

As PC makers raked in profits amid surging sales, analysts cautioned that the spending spree could soon dry up. The high demand was unsustainable, they said, and corporate buyers would eventually reduce their purchases after buying enough systems to meet future needs.

They also warned that there were few differentiations between the various PCs being sold and that there was little technological innovation -- both on the hardware and software sides -- on the horizon that would entice enterprises to upgrade.

With those problems already beginning to percolate, the PC industry was crippled by the weakening U.S. economy, which chilled once-red-hot Internet-related businesses.

The demand for PCs collapsed, resulting in thousands of industry layoffs, dwindling earnings and an ongoing price war.

Now, after enduring months of an industrywide slump, PC makers are looking for a second-half rebound and a new wave of prosperity.

But problems facing the industry before the recent downturn have lingered and may well thwart a hoped-for resurgence.

In large part, many corporate system managers said they saw no compelling need to upgrade to faster PCs, contending that their existing computers were more than sufficient to meet their demands.

"As I told our corporate staff, the big expenditures are over," said David Howell, information system manager at PED Manufacturing Ltd., in Oregon City, U.S.

"We had to spend a lot of money here for Y2K, then for Windows 2000. But I see little need to upgrade our PCs over the next 12 months."

The closest thing to new software coming down the pike is Microsoft Corp.'s much-hyped Windows XP. But Howell, who recently bought 800MHz Pentium III systems, is testing Windows XP and does not see a need to integrate it into his company over the next year.

"It's got a few more bells and whistles, but I believe Windows 2000 more than satisfies our needs for now," he said.

Desperation

Even PCs far slower than today's newest models are more than sufficient to handle many companies' applications.

After demand for PCs crashed late last year, leading computer manufacturers began slashing prices and aggressively pursuing corporate customers with lower prices and good deals. But those deals are being offered to a customer base that is increasingly more interested in new technologies than cheaper PCs.

"We are getting tons of vendor calls saying, 'Have we got a good deal for you.' But I'm not interested in their low prices," said Joel Salamone, MIS director of The Motley Fool Inc., in Alexandria, Va., adding that his company is cutting back on IT spending.

Having already upgraded to PCs featuring 800MHz processors, Salamone said there's little pressing need to upgrade over the next year.

"Our developers, the power users of our company, are not complaining about their systems being slow," he said, "so it's hard for me to say we'll be buying new things for them because there is nothing wrong with what they have."

Rather than pitching price, PC makers would do better focusing on technological innovation, IT managers said.

"PCs really haven't changed that much over the last several years," said Marshall Fernholz, procurement manager for the American Medical Association, in Chicago.

"PC makers should focus less on just adding faster processors and more memory and focus more on redesigning the basic architecture to eliminate other performance bottlenecks, such as improving bus speeds and hard drives."

Salamone agreed, saying that what interests him more than new PCs is new technology such as the blade servers that are now hitting the market from major vendors and startups -- such as RLX Technologies Inc. -- that will enable data centers to put more servers in the same amount of rack space. There are few such new innovations in PCs, he said.

Statistics compiled by Gartner Dataquest bear that out, showing the growth of PC units sold falling from 24 percent in 1999 to an expected 1 percent this year.

The most recent figures compiled by another research company paint an even gloomier outlook for the industry.

Further adding to the PC industry's woes is that a predicted consolidation among vendors that would have benefited the companies left standing has yet to occur, leaving a crowded field competing for fewer available dollars.

"Everyone knows there should be consolidation, but no one wants to be the one to leave," said Andy Neff, an analyst with The Bear Stearns & Co. Inc., in New York.

Part of the problem is that, while Dell Computer Corp.'s efficient business model gives it an advantage over other top- tier competitors, smaller companies, known as "white box" makers, insist that they remain the low-price leaders and are not about to be driven out of business.

"They are not playing in our sandbox," said Phil Senff, director of Internet services for iBiz Technology Corp., in Phoenix. The company makes custom Intel-based servers for its customers.

"Dell is not hurting us any. We use the same Intel boards and processors and much of the same stuff they use in our servers," Senff said. "But they have a bad habit of putting their name on it and then charging three times more for it."

According to projections from Gartner Dataquest, PC revenues will decline 9 percent this year, even though unit sales may total the same as last year.

"The price war is definitely having an affect on OEMs' profits," Gartner's Smulders said.

The price battles will continue to cut into their profit margins. Some, like Dell, will continue to push pricing cuts in hopes of riding out the downturn. Others, including Compaq and Hewlett-Packard Co., will continue to try to diversify their portfolios to lessen their financial dependence on computer sales.

But until corporate buyers, already well-stocked with computers, see an incentive to upgrade what they have -- read, new technologies -- the once red-hot PC industry will continue to limp along.

"It's a pretty sorry picture this year," Smulders said.

-- eWEEK