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Desktops becoming a less viable business

With thinning margins in the desktop space, PC makers are seeing higher profits and bigger growth in the notebook space

Once at the epicentre of PC makers’ profits, desktops are losing their luster as a viable market as companies are hit by thinner profit margins and more emphasis is placed on mobility, analysts say.

Users are increasingly adopting laptops as prices fall, and desktops are being bumped to a niche audience including task workers and gamers. The increased laptop adoption has dropped the average selling price of low-end desktops, which has led to low margins for vendors, especially in the U.S.

On Thursday, Dell (NASDAQ: DELL) reported that its desktop revenue fell five per cent year-over-year despite a nine per cent increase in shipments in the first quarter of 2009.

“It’s important to point out that our notebook growth rate was high and indicative of the trend toward mobility products over the desktop,” said David Frink, a Dell spokesman.

Dell’s business model was built around desktops in the client and corporate space until a few years ago, and its failure to quickly turn to laptops put its business in trouble, said Roger Kay, president of Endpoint Technologies Associates. The shift to mobile products across the major product lines has put the company back on track, Kay said.

“The trend of switching over to notebooks will continue to rise. I don’t think they’re going to stop anytime soon,” Kay said.

Dell’s laptop shipments grew 43 per cent during the quarter, with revenue growing 22 per cent year-over-year to US$4.9 billion.

Dell’s drop in desktop revenue reflects a growing problem with the desktop market in general, said Charles King, president of Pund-IT. “Desktops have traditionally been a market where profit margins are extremely thin to begin with.”

Notebook sales overtook desktop sales for most vendors, which are becoming wary about their desktop businesses because of competition and low margins, King said.

“It is a warning flag, not just for Dell. Almost all the PC vendors are going to see … problems with their desktop sales over time,” King said.

While demand for desktops in the U.S. has slowed down, the demand for desktops has shown more life internationally. The world’s top PC vendor, Hewlett-Packard (NYSE: HPQ), did not record year-over-year growth in desktop shipments in the U.S. in the fourth quarter of 2007, shipping just 2.15 million units, according to IDC. But HP shipped 6.86 million desktops worldwide, a 10.7 per cent increase over last year’s fourth quarter.

While desktop and laptop prices are close to par in the U.S., low-end desktops are more affordable than laptops in developing countries, which makes them appealing as a first machine for users, Kay said. The trend is changing, with laptops like the XO from One Laptop Per Child and Asus’ Eee PC aimed at first-time users.

“When you look at how aggressive vendors have been in pricing those products — increasingly aggressive I think — and relying more and more on low-end sales as opposed to high-end gaming and business PCs … a company can have actual increases in sales but declines in revenue,” King said.

Desktops are highly configurable compared to laptops — which are highly integrated — so gaming-system builders and niche white-box vendors may flourish on building desktops, Kay said. Theoretically, everything else in desktops could go mobile.

“If the price is the same between notebook and desktops, [users] will go mobile,” Kay said.