Analysts: PC Market Unlikely to See Sweeping Changes From HP-Compaq Deal

SAN JOSE, Calif. – With too many players fighting over dwindling sales of nearly identical products, the personal-computer industry was ripe for the consolidation promised by the mega-merger of Hewlett-Packard Co. and Compaq Computer Corp.

But although the new Hewlett-Packard would outsell industry leader Dell Computer Corp. and have about 40 percent of the U.S. consumer market, several analysts said Tuesday the deal is not likely to bring about earth-shattering changes in the PC industry.

Consumers have been enjoying remarkably low prices on PCs for months, with manufacturers offering rebates, free Internet access and other incentives to stimulate demand in a saturated market. That situation is likely to remain intact even if the HP-Compaq deal goes through next year, unless the economy picks up substantially or computer users find a strong reason to upgrade.

That is because the pricing environment still figures to be driven largely by Dell, which does not have a retail presence and sells directly to businesses and consumers -- letting it keep costs down and inventories at a minimum. Dell's expenses are about half of HP's and Compaq's.

"Dell is probably pretty happy about this merger," said Todd Kort, principal analyst with Gartner Dataquest in San Jose. "Dell knows they can compete very well. The combined company is still highly vulnerable to Dell's attack."

Investors agreed, sending shares of the Round Rock, Texas, company up 4 percent even as they punished Hewlett-Packard, sending it down 19 percent, and Compaq, which fell 10 percent.

To be sure, the $20 billion HP-Compaq deal is about much more than PCs. The companies stressed the merger would give them more opportunities to sell printers, scanners and digital music players to consumers; and servers, data storage devices and consulting services to businesses.

PCs are just part of the bundled "solutions" HP wants to offer as it strives to be everything to everyone in the high-tech world.

"It's about changing the game, not only for our two companies, but for the industry as well," said Carly Fiorina, Hewlett-Packard's chief executive and chairman.

But there's no denying the importance of the deal to the PC industry.

Compaq ranks second in worldwide PC sales; HP is fourth. The PC business has been a money loser for both companies recently, and some analysts had suggested that HP get out of that line altogether.

Industry watchers, including Fiorina, had predicted for months that some consolidation of PC makers was likely. And more deals are likely.

"Incredible value way underpriced can only last so long before you see fundamental market eruptions such as this consolidation," said Ralph Oliva, director of the Institute for the Study of Business Markets at Penn State University. "I think this signals to me the beginning of a fundamental rebalancing of this market."

Oliva believes that could lead to higher PC prices, or at the very least, "prices not declining as rapidly."

Compaq and HP dominate in retail stores such as CompUSA and Best Buy, which also tend to offer computers by Sony and eMachines. So the deal could mean fewer choices in those kinds of stores.

Dell and Gateway Inc. concentrate on direct-sales models, though Gateway -- which is pulling out of overseas markets, where HP has a strong presence -- does have 300 of its own Gateway Country stores around the country.

Dell and Gateway said the merger would not change their strategies. Even though the joint HP-Compaq might be able to get lower prices on chips and other PC components by buying in higher volumes, "we've got a lot more flexibility in what we do," Dell spokesman Mike Maher said.

Eliminating a competitor will alter the market somewhat in HP's favor, of course.

Compaq has been one of the biggest resellers of printers by HP rival Lexmark International. So stopping that is a potential boon to HP, which generates most of its profits these days from selling high-margin ink cartridges for its printers. Maher said Dell has no plans to stop selling HP printers with its computers, because customers want them.

But margins on PCs themselves are not likely to increase any time soon. Making matters worse for PC makers -- other than Apple Computer Inc., which occupies a niche with computers based on its own operating system -- their products are almost entirely the same, beyond price and packaging.

Laurie McCabe, a vice president with Summit Strategies in Boston, said 90 percent of the components in HP and Compaq PCs are the same. Since the goal of the merger is to cut costs and speed the sales process, those redundant PCs seem among the most likely products to be cut.

"I can't imagine this is going to have any kind of big macro impact on PC pricing," she said. "But if they do make the decision to discontinue certain products because of the merger, those will be available, I'm sure, at pretty steep discounts."