PC Sales Under Pressure

Competition from snazzy consumer electronics and the absence of Microsoft's(MSFT Quote) Vista operating system this holiday season will force PC vendors to reduce prices, pushing PC revenue down 2.5% for the year.

Worldwide revenue in the PC industry is expected to total $198.3 billion in 2006, compared with $203.3 billion in 2005, according to a new report by industry research firm Gartner.

That marks the first year of negative revenue growth since 2001, although unit shipments in 2006 will increase 10.5%, according to Gartner.

"Steeper PC price declines will spur unit growth in mature markets like the United States over the near term, but growth will eventually slow to mid-single digits in these markets as PC replacements fade and saturation becomes more problematic," Gartner's client platform research director George Shiffler said in a statement.

The report paints a bleak picture for PC makers such as Dell(DELL Quote) and Gateway(GTW Quote), which have seen their profit margins ravaged in recent quarters on account of falling prices for computers and slowing sales.

In August, Dell said that steep price cuts in the second quarter failed to ignite its PC sales as much as expected.

According to Gartner's Shiffler, the PC market is becoming increasingly price inelastic -- that is, price cuts are not automatically yielding a corresponding increase in sales.

This is particularly true in regions like the U.S. and Western Europe, where the market is already saturated with PCs, and purchases are increasingly coming from replacements where price plays less of a role in buying decisions.