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Consumers now key to high-tech's sales

More companies than before rely on home users, but that sector is looking vulnerable.

October 20, 2008|Michelle Quinn and Alex Pham | Times Staff Writers

The high-tech industry's near-term health depends on how badly you need that iPod or flat-panel television.

After catering to corporations in its early days, the industry has grown increasingly reliant on consumers. Even during economic slowdowns when businesses tightened their belts, Americans kept buying bigger TVs, sleeker cellphones and faster computers.

But analysts say that with people losing their jobs, home prices plummeting and retirement savings deflating, consumers won't continue to blithely spend on high-tech gear. For those who do, bargains will be more important than ever.

"Consumers are definitely scared and are going to tighten up," said Michael Spence, former dean of Stanford University's graduate business school and a 2001 Nobel laureate in economics. "If it goes on for much longer, the tech sector will suffer."

Stocks of tech companies with heavy consumer exposure have been hit even harder than the broader market.

In the last 30 days, the Nasdaq composite index has fallen 18.5%. But shares of Apple Inc., which reports earnings Tuesday, have tumbled 24%. Computer maker Dell Inc. is down 19.5% and video game publisher Electronic Arts Inc. more than 27%. The stock of electronics retail giant Best Buy Co. has fallen nearly 38%.

Tech companies with a greater proportion of corporate customers have also been hammered, but some not as badly. Hewlett-Packard Co. is down 13% while Cisco Systems Inc. has lost 18%.

The computer industry rose to prominence selling mainframes, databases and other wares to government agencies and major corporations. Although enterprise computing remains a huge business, many companies shifted their attention to consumers as electronics became a key part of our daily lives -- seen as more of a necessity than a luxury.

In the last two years, Brad and Jennifer Schafer of Newport Beach have purchased three flat-panel TVs, a digital camera, two game consoles, three TiVos, a GPS device, a cellphone and a computer.

"If we want it, we usually buy it," said Jennifer Schafer, a stay-at-home mother of two, as she and her husband, an accountant, shopped recently at a Best Buy in Tustin.

Consumers have helped to accelerate innovation. Having millions of buyers has spurred hardware companies to streamline their manufacturing and trim prices faster, which in turn boosts sales.

As a result, technology that once took a decade or more to penetrate the mass market now takes far less time, said Kurt Scherf, principal analyst of Parks Associates in Dallas.

The growth of wireless networking equipment was driven by consumers, who adopted the technology for its convenience even as companies that worried about the expense and security issues were slower to use it, Scherf said.

"It used to be that technology trickled down from the corporation to the consumer," he said. "That's really turned on its head. Consumers are now driving the purchases and the innovation."

Nowhere is the consumer's effect on technology more evident than in the personal computer market. This year, 44% of worldwide PC sales have been made to consumers, compared with 29% in 1996, according to research firm IDC. With laptops, sales to consumers make up 26% of worldwide market share, up from 3% in 1996.

"The growth engine for the last couple years has been the consumer market," IDC analyst Richard Shim said. "The risk is that given the recent economic turmoil, the industry is headed for bad news."

Jeremy Gin, 30, recently bought a $499 Sony Vaio laptop over more expensive options such as Apple's MacBook. Gin, who runs a Web start-up called SiteJabber in Sunnyvale, Calif., plans to keep using his older-model BlackBerry, despite being "embarrassed to be seen with this phone with all the people with their iPhones looking sleek," he said.

At the Apple store in Emeryville, Calif., on Wednesday, Kevyn Davis, 22, stopped in to pick up the 3-year-old laptop he had brought in for repairs. But he wasn't making any purchases. To save money, the Vallejo resident says he has stopped using his cellphone and paying the bill.

"I used to be the person who had to have the latest thing," said Davis, a teller at Chase bank.

Sales of home entertainment electronics, such as game consoles, are expected to remain relatively strong. Analysts expect some consumers to justify these purchases as a way to stay busy at home while they cut back on vacations and dining out. In the 10 weeks that ended Sept. 26, flat-panel TV sales were up 43% compared with the year-earlier period, according to the Consumer Electronics Assn.

But TV sales are unlikely to continue at the same pace, which was spurred in part by tax rebate checks. People will still buy, but mostly cheaper models, analysts said.

"There may be a shift from frivolity to functionality," said Ely Dahan, an assistant professor of marketing at UCLA's Anderson School of Management. "Do I need to spend $2,000 on a flat-screen TV to be happy?"

Likewise, consumers will still buy cellphones because the device is now considered an unavoidable expense by many, said Ross Rubin, an analyst with NPD Group. Still, some Wall Street analysts have predicted that the cellphone industry will soon start growing at a slower rate because consumers will hold off on purchases.

Technology companies can slash prices to attract customers. But price cuts can backfire, damaging a high-end company's brand or signaling to consumers that even bigger discounts might be coming.

Some sales do work, piquing the interest of people such as the Schafers who help the industry through rough times.

"If there are more sales, we may buy more," Jennifer Schafer said. "It's something we do real well -- boosting the economy."

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michelle.quinn@latimes.com

alex.pham@latimes.com

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