July 18, 2003 1:03 PM PDT

New mantra for PC makers: Diversify

Although consumer PC demand led to better-than-expected sales growth in the second quarter, manufacturers that focused only on the consumer market were not the ones that benefited.

Apple Computer saw its worldwide market share drop to 2.3 percent, down from 2.7 percent a year ago, although slightly up from the 2 percent Apple had in the first quarter, according to research firm IDC. Gateway saw its shipments decline by more than 24 percent from a year ago, with its share of the U.S. market dropping to 4.2 percent, from 6.1 percent a year earlier.

By contrast, Dell and Hewlett-Packard saw most of the benefit from the upturn in PC sales, with each company posting double-digit gains. Dell and HP have strong consumer sales, but also sell a lot of PCs to businesses and governments.

Apple's quarter "wasn't as good as other top vendors, but they just announced new products," IDC analyst Loren Loverde said of Apple's market share drop. "Apple sales tend to respond to new products." Loverde noted that Apple recently announced the Power Mac G5, which will start shipping in August and could boost sales.

Although unit sales were down, there were bright spots in Apple's earnings report. The company last quarter had its highest revenue level in nearly three years by selling higher-priced machines, as well as more of its iPod music players. The iTunes Music Store offers another potential boost to the Mac maker.

Nonetheless, Apple's market-share drop comes despite a year-old "switch" ad campaign specifically designed to boost Apple's market share by wooing Windows users to the Mac. In the second quarter, Apple said it shipped 771,000 Macs worldwide, down from 808,000 units a year ago.

Gateway has embarked on a diversification strategy of its own, aiming to sell home-theater systems and flat-panel TVs alongside its traditional PCs. The company's PC share has continued to slide in the U.S., with Gartner estimating that Gateway shipped just 493,000 PCs in the U.S. last quarter, down from 651,000 a year ago.

Although the company has struggled to maintain market share, CEO Ted Waitt said in a recent interview that the PC remains a critical part of Gateway's plans.

"It's a huge business and it's going to continue to be a huge business, but the economics of the PC business dictate that we have to do a lot of other product lines," Waitt said.

Some of Gateway's market share losses have come as Dell and HP have been more aggressive in search of share by offering sub-$600 PCs.

"We haven't competed as well as we'd like on the low end," a Gateway representative said on Friday. "We have definitive plans to re-enter the low end of the market in the third quarter."

Apple, meanwhile, is continuing to focus on its core Mac business while trying to expand into the music industry, both through sales of the iPod and through its iTunes digital music store.

The expansion into the music business could help offset relatively flat PC sales, but it isn't clear how much benefit the company will get from selling music downloads. The company did say its iTunes Music Store was nearly at the break-even point, with 5 million tracks sold by the end of last quarter. The company expects to sell far more songs once it has a Windows version of iTunes available later this year.

Needham analyst Charles Wolf said in a research note this week that Apple could capture 20 percent of the U.S. pay-per-download market with its iTunes Music store. Wolf estimates that the overall U.S. online download market could reach $2.9 billion, meaning that the Apple store could generate $600 million in annual revenue.

As for the PC business, some analysts say it's time to stop measuring Apple and Gateway by their slice of the overall PC market, anyway. Gateway and Apple, as well as laptop specialist Toshiba, address only part of the market, said NPD Group analyst Stephen Baker.

Gateway, for example, is much less aggressive at selling to large businesses, while Apple has concentrated at the high-end of the consumer market.

"Nobody expects that you can sell Acura TSX sports cars as Taurus wagons," Baker said.

CNET News.com's Michael Kanellos contributed to this report.

 

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