It's time to retire another orthodoxy of the boom-era '90s: the three-year PC upgrade cycle. Though 2002 was expected to see a surge of PC replacement buys, following a banner year in '99, it's clear those hopes have proven hollow. For 2002, worldwide PC sales are expected to increase only 1.6% over last year's levels, market research outfit IDC said last week. Meanwhile, 2003 should see growth closer to 8%. While an improvement, that's still well below the double-digit increases that ruled the '90s. The meek outlook offers still more proof that the era of tech for tech's sake is over, with future PC purchases likely to be stretched out over a period of four or five years and tied more closely to business profits than to whiz-bang technologies. It became an article of faith among tech investors that companies would undertake a wholesale replacement of their computers every three years. But the three-year cycle was a risky assumption, says Lehman Brothers' Dan Niles. "It's not like we're going to get this big wave," he says. "Nothing in the numbers tells you there ever was a three-year cycle." Niles believes companies and consumers probably have always followed a four- or five-year PC replacement cycle in the past. About two-thirds of PCs are sold to companies, with those purchases split evenly between big businesses and small- and medium-sized outfits. But on a list of six technology priorities, corporate IT officers rank PCs second from the bottom, just above networking, a recent Merrill Lynch survey found. "We haven't been able to corroborate a major upgrade cycle," concludes strategist Steven Milunovich in a note with the survey. Given the low priority accorded to computers, it's not encouraging that Merrill also found companies want to reduce IT spending as a percentage of revenue (from its present average of 5%).
Nor does the corporate profit track record give much reason for hope at the moment, by Milunovich's reckoning. Though profits have now edged up for three quarters in a row, they remain at a low level. "Pre-tax profits have plunged from 6.2% of GDP in 1997 to a pathetic 3.1%," he writes. "We don't see how capital spending does more than stabilize in 2003; we're more optimistic for 2004." Underscoring that point, No. 2-ranked PC vendor Hewlett-Packard ( HPQ) said at an analyst meeting last week that it expects its '03 revenue growth merely to equal its outlook for overall IT-spending growth, increasing 2% to 4%. H-P is hardly anticipating much of a boost in the PC division, which supplies about a quarter of the company's revenues. "I think the computer life cycle is being stretched out, and, financially, people are now amortizing over four or five years rather than three years," says Roger Kay, director of client computing at IDC. "You reach good-enough computing, where you can run a standard office load that seems to work pretty well" on an older PC. Still, he says, the longer people delay replacing their computers, the greater the disparity will be between their PC's performance and the best-available performance on the market. "The fact that executives are watching the hourglass spin will cost you at some point," Kay says. Consider clockspeed, a measure of how fast computer chips process data. While many PC users now work on computers with clockspeeds of around 400 to 600 megahertz, Kay expects hardware makers to introduce chips that are 10 times as fast within the next year or so, at about 4 gigahertz. Intel recently rolled out a 3-GHz processor.
A Stretched-Out CycleWhile companies and consumers will eventually have to upgrade PCs purchased at the tail end of the '90s, analysts agree that it will likely take place gradually rather than all at once.
To be sure, three years ago, U.S. PC shipments did see a hefty jump of 22%, according to IDC. But in retrospect, that was a fluke. Analysts chalk it up to a mix of factors, including a booming economy, Y2K preparations and a surge of consumers who wanted to get access to the Internet. "There was a lot of PC purchasing just because people had money. But I'm not convinced it was an upgrade cycle, per se," says Steve Kleynhans, vice president at Meta. "An upgrade cycle is something continuous. Every year organizations replace a portion of their fleet." Today, there are no equally powerful incentives to fuel new PC purchases. Though there are now 180 million PCs that are more than 4 years old, according to Lehman Brothers' Niles, he doesn't expect 2003 to be a boom year for PC buying. Niles estimates that overall IT spending will only grow about 3%. Still, computer sales could perk up a little in 2004, assuming an economic recovery gains traction. IDC has predicted PC sales will grow 11% in 2004 (though that estimate is sure to be revised over the next year). Along similar lines, Niles believes IT spending could rebound to a long-term rate of around 8% a year, or two to three times faster than GDP. That's considerably less than the '90s, which supported IT buying around four to five times greater than U.S. economic growth. "We're taking down how much faster things can grow relative to the economy, but it's still decent growth," he says. For investors, 8% sales growth would be a big improvement over this year's tiny gains.