H-P narrows the PC field

Associated Press

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 that the $20.3 billion merger plan announced Tuesday 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 its 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."

To be sure, the HP-Compaq deal is about much more than PCs. The companies stressed that 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 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."