10 Things You Need to Know: PC, R.I.P.: The New Kids Are in Town

The clunky box taking up desktop space may soon be only that, as the PC is undermined by new trends.
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This story is part of a weeklong series that looks at the top 10 trends to help you invest in the coming year. Click on the tile at left to see other stories.

In 2000, investing in the PC market means looking everywhere but at the PC.

Products such as

Research In Motion's

(RIMM)

email-accessible pager and

Casio's

Cassiopeia

handheld organizer are the hot sellers, and they enable people to take a PC's functions anywhere. And these days, that's seemingly what everyone wants.

Companies that offer this capability -- or even a promise to do so -- are winning in the marketplace and the stock market. Last year, the

Dow Jones Computer Peripherals Index

shot up 132%, compared with a 45% return for the

Dow Jones Computer Hardware Index

.

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At the other end of this PC spectrum are enterprise computing companies called application service providers, or ASPs -- companies that offer Internet-based software or Web-hosting programs to companies. Names such as

Viant

(VIAN)

and

SilverStream

(SSSW)

became ASP highfliers, rising 306% and 381%, respectively, last year.

"Our investment thesis is that the profits in the computer industry are moving above and below the PC -- above into enterprise computing and below into information appliances," says Steve Milunovich, a hardware analyst in

Merrill Lynch's

technology group.

For PC makers, all this means tougher times ahead as their actual boxes become less crucial.

Keeping Up

Of course, some PC companies are trying to evolve.

Dell

(DELL) - Get Report

, for instance, partnered with Research In Motion, maker of the

de rigueur

Blackberry

pager-plus favored by corporate executives who need their email no matter what their latitude.

Some PC makers are getting into this market on their own, too.

Compaq

(CPQ)

makes the

Aero

, and

Hewlett-Packard

(HWP)

the

Jornada

, both essentially handheld PCs.

Compaq's Aero, H-P's Jornada and Casio's Cassiopeia sold out in the fourth quarter, says Michael Kwatinetz, an analyst at

Credit Suisse First Boston

. (His firm has done no underwriting for Compaq or H-P.)

On the enterprise computing side, H-P will exchange computer equipment for revenue from communications networker

Qwest's

(QWST)

ASP unit.

The problem is that all these ventures are still relatively small for these companies, which means they won't make much of a dent in the bottom line for some time. In fact, Merrill's Milunovich doesn't even include handheld sales when putting together his boxmaker earnings models.

Small Items, Big Growth

Instead, the real growth is coming for companies such as

3Com's

(COMS)

Palm Computing

unit, which 3Com expects to spin off this year. Then there's privately held

Handspring

, run by the Palm co-founders. Its

Visor

handheld computer has seen overwhelming demand. Handspring is considering going public.

Bypassing the PC by using cellular phones with Internet connections is also gaining momentum.

Phone.com

(PHCM)

, which sells software for the delivery of Internet-based services to wireless phones, is benefiting from this trend and has plenty of company, including

Ericsson

(ERICY)

and

Wireless Knowledge

, a joint venture between

Microsoft

(MSFT) - Get Report

and

Qualcomm

(QCOM) - Get Report

.

Then there's the enterprise software business, including big names such as

Sun Microsystems

(SUNW) - Get Report

and

EMC

(EMC)

, as well as smaller firms like

USinternetworking

(USIX)

and SilverStream. This business is a threat to PC makers because it can force them to churn out cheap boxes that do little more than attach to the Net, says Sam Albert, president of the PC consulting firm

Sam Albert Associates

.

Never Fear, the PC Is Here

PC makers say they're up to the challenge.

"We are entering a big space of utility computing, so we aren't that concerned yet about our competition," says Nick Earle, chief marketing officer for H-P's enterprise computing division. "The key word for us is going to be mobility. By partnering with Qwest on the back end and companies like

Swatch

on the front end, we feel we will have a lot of that." H-P signed a deal late last year with the Swiss watchmaker to turn its watches into Internet appliances.

It's unclear whether

Dick Tracy

-like wristwatch Net surfing or cell phones that can download

War and Peace

will be a trend that affects the boxmakers' bottom line. But those that fail to acknowledge the move away from the desktop PC will find upstarts such as SilverStream, Palm Computing and Research In Motion eating away at their market share.