SAN FRANCISCO – Computers may be the last thing left on the shelves this holiday season as the delayed release of Microsoft's Vista operating system, laptop battery recalls and other challenges dent U.S. sales, analysts said.
Personal computer makers, such as Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ), usually count on the year-end consumer spending spree to boost revenue, but this year, a number of factors are combining to dampen the holiday cheer.
Declining U.S. home prices and slowing economic growth are tightening purse strings just as PC makers hope consumers will spend more for advanced processors, memory, monitors and disk drives to take advantage of new features in Vista, set for release in January, analysts said.
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A worldwide recall of nearly 10 million battery cells used in notebook PCs sold by Dell, Apple Computer Inc. (AAPL), Toshiba Corp. and others has led to shortages and potential shipment delays.
The battery cells, made by Sony Corp. (SNE), were at risk of overheating.
"Microsoft having missed the holiday season for consumers is going to put a pretty good dent into spending by consumers for PCs," said Roger Kay, president of market researcher Endpoint Technologies Associates Inc.
Some PC makers and retailers are responding to the Vista delay by offering Microsoft-issued (MSFT) coupons for low-cost upgrades to the new operating system, and cutting computer prices to entice buyers.
But research firm Current Analysis, which tracks weekly PC sales, estimates that consumers will hold off buying high-end PCs until after Vista.
It forecast 70 percent of notebooks sold this holiday season will be priced below $1,000, compared with 58 percent a year ago and 38 percent in 2004's holiday season.
"We expect to see a lot of activity at the low end of the consumer side," said Samir Bhavnani, research director for computing and storage at Current Analysis. "A lot of the mid-tier and upper-tier customers are going to delay purchases until the first quarter of next year."
The No.2 contract laptop maker, Taiwan's Compal Electronics Inc., which supplies brands like Dell and HP, last week said demand in the fourth quarter is strong but component shortages, especially for batteries, will affect its output.
Dell spokesman Bob Pearson said the company's recall of 4.2 million Sony-made battery cells had not led to shortages.
"We were pretty prepared going into the recall," he said.
Dell is offering free upgrades to Vista for buyers of systems with Windows XP Media Center or Professional editions, though there will still be shipping and handling charges.
Despite these kinds of promotions, industry indicators show PC demand is slowing and may not pick up for the holidays.
Demand for motherboards, the computer circuit boards that contain the microprocessor and memory, "is falling off a cliff," Goldman Sachs (GS) analyst Henry King wrote in a research note last week.
He cut his fourth-quarter motherboard shipment growth forecast to 8.8 percent from 10.8 percent in the third.
According to market researcher IDC, PC shipment growth slowed to 7.9 percent in the third quarter, from double-digit percentage growth in the prior three years. The battery recalls may cut into fourth quarter growth, IDC said.
Bank of America (BAC) on October 31 cut its 2006 PC growth forecast to 9.4 percent from 10 percent.
All this suggests that consumers looking for bargain gifts may opt for less-expensive gadgets such as cell phones, digital music players, video phones or noise-cancelling headphones.
"When you look at this year's potpourri of available items, there are some items that aren't that expensive," Kay said. "PCs these days are like gum drops. You can buy them or forego them entirely depending on whether you're feeling hungry."