Oligopoly Watch

The PC oligopoly tightens

PC maker Gateway announced that it would acquire rival eMachines for around $235 in cash and stock. Both companies sell PCs in the US, but have different strategies. Gateway sells through mail order and its own retail outlets, while eMachines sells mostly through big box retailers like Wal-Mart, Best Buy, Circuit City, Costco, and Office Depot. And while Gateway just announced yet another losing quarter, eMachines has found a way to make a profit on its operations.

The merger will consolidate what appear to be the fifth and fourth largest PC makers in the US. But these two will still be dwarfed by #1 and #2, Dell (30%) and HP (around 21%). HP, as you know, recently completed its acquisition of Compaq. IBM, which mostly sells direct to business customers, and Toshiba are #3 and #6 in the US. Apple, while not directly competitive, is #7 with 3% of the market.

Worldwide, the industry is getting more and more concentrated. HP and Dell have close race for #1 and #2 and around 17% market share each. (HP slipped into first place in the last quarter.) They are followed far behind by IBM, Fujitsu Siemens Computers (a joint venture of the Japanese and German companies), and Toshiba. All of these companies are showing progressively smaller margins, as competition is strong. 2003 set a record for PCs sold (up 11% worldwide), but industry gross income declined by around 20%.

The new Gateway hopes to be one of the survivors as the necessary consolidation of this all-too-competitive industry takes place. As computer makers have become mostly markets and assemblers, the advantage goes to those who are in position to bargain from strength with hardware and software suppliers. And who can master just-in-time manufacturing and delivery. It also is important to be able to stand toe-to-toe with the big retailers. Gateway is another innovative, folksy company like Ben & Jerry's that can't make headway against better organized oligopolies in a maturing market.  [Oligopoly Watch]

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