The tricky interplay of supply dynamics in the IT industry sent two industry powerhouses reeling, while two "troubled" companies breathed sighs of relief last week.
Compaq took the biggest hit, with its quarterly profits plummeting 96 per cent compared to the same period one year ago. The company hinted at dramatic changes when Eckhard Pfeiffer, chairman and CEO, said recently in a statement: "The second quarter will be the time Compaq repositions itself with almost a complete new product line, from handheld devices to high-end servers."
Although Compaq's recent fire sale is seen as a primary reason why its profits were gutted, Intel's one-size-fits-all processor strategy, which was helpful in providing standards and keeping computer costs down, is now seen by one analyst as a factor in the downturn.
Drew Peck, an analyst at Cowen and Co, pointed out that a Pentium II essentially costs the same whether it is used in a desktop or a server.
This flat structure is driving Intel's "segmentation" strategy, in which the company is trying to target cheaper chips for low-end computers and NCs, and reserving more costly processors for the profitable high end. But until notably differentiated processors arrive, Intel has little leeway to make its case, Peck said.
"Most users did not get immediate gratification from upgrading" to new Intel processors during the last year, causing many to delay purchases, Peck said. This, in addition to contributing to Compaq's woes, had a slingshot effect that impacted Intel, which recently reported its quarterly net income tumbled 36 per cent from the same period one year ago, to $US1.3 billion.
"This was a disappointing quarter," Andrew Grove, Intel's chairman and CEO, acknowledged. "The PC industry seems to have gotten ahead of itself, building more products than end customers purchased."