When Compaq Computer, the world's biggest personal computer manufacturer, warns that its first-quarter earnings will be less than half of what Wall Street had expected, investors take notice.
Many fear that the unexpected announcement could indicate a fundamental shift in the PC market as well as crisis for the Houston-based market leader.
The key question for investors is whether the problems are limited to one company, or are shared by the entire PC industry and component suppliers.
Some information technology analysts believe the industry is in the middle of a "tectonic shift", in which traditional PCs will first be replaced by cheap versions, and then by new gadgets such as smart phones, WebTVs and WebPads.
This shift has been developing for some time. Three years ago Mr Larry Ellison, chief executive of Oracle, the second-largest software company, predicted that PCs would be replaced by so-called "thin client" devices - machines which, Mr Ellison argued, would rely upon network connections and powerful host machines for much of their computing power and hence would be cheaper and easier to use.
In fact, PCs manufacturers have fought off this threat, for the moment at least, by cutting prices and by embracing the use of Internet technologies - particularly web browser software. The result has been that, at least to some extent, PCs themselves have become "thin clients".
But the cost has been large: a vertiginous drop in prices which, for the immediate future, is the key challenge for traditional PC makers.
Although personal computers sales are expected to grow by about 14.3 per cent this year to 103 million units, according to International Data Corporation (IDC), average prices are plunging. IDC expects the total value of worldwide PC sales to grow by just 4.3 per cent this year. In the US, where competition is the most severe, market growth (measured by revenues) is expected to be virtually flat.
Two years ago, the average price of a PC in the US was $2,100 (€1,962). Today it has dropped to $1,200, and PCs selling for as little as $300 have begun to appear in retail stores. The fall in prices has squeezed the profit margins of all but the leanest of PC makers, and has hit big "traditional" manufacturers such as Compaq and Hewlett Packard more than upstart newcomers such as Dell Computer and Gateway which use direct sales as the main vehicle for distribution.
Compaq itself, which is now expected to announce first-quarter sales of around $9.4 billion and earnings of just 15 US cents per share compared with Wall Street expectations of 31 cents, blamed lower earnings on PC price wars and unexpectedly low demand for business machines.
The statements suggest a fundamental shift in PC purchasing patterns. Rather than looking for the latest, fastest models, business buy ers are looking for bargain prices. The impact of the "sub-$1000" basic PC has now moved beyond the consumer sector, where it has been evident for the past six months, into the business sector where it is now dragging down average selling prices and squeezing profit margins.
Mainstream business buyers are beginning to demand the same sort of prices that consumers pay for PCs. This is creating a huge challenge for PC manufacturers who, until now, could balance the low-margin consumer business with higher profits from business PCs.
Compaq is hardly alone in struggling to come to terms with the new economics of the PC market. International Business Machines (IBM) revealed last month that its personal systems group responsible for PC sales lost nearly $1 billion last year, much more than its $161 million loss in 1997.
Partly in response, IBM has announced a series of measures to beef up its online business including a scheme called Project Odes sey which is aimed at making it easier for small businesses to buy IBM PCs via the internet.
Yet Dell Computer, Compaq's arch rival also based in Texas, continues to report higher profits and growing market share. The direct sales model and surging internet sales enable it to compete most efficiently in the new environment. Even so, some analysts believe Dell could face tougher times ahead.
"The problem is that 58 per cent of Dell's sales are in the $2,500-$3,000 segment, but this is only about 1 per cent of the overall market," said Mr Ashok Kumar, an analyst with Piper Jaffray. "Soon 90 per cent of the market will be below $1,500 - if Dell doesn't move now their strategy will fall through the cracks."
Meanwhile, in the Internet age, the PC itself potentially faces growing competition from other types of devices including digital set-top boxes, smart telephones and handheld digital assistants.
The first generation of these devices has just begun to appear on shop shelves and are generally expected to be cheaper and simpler to use than standard PCs.
For example, in Britain digital television subscribers are to be offered access to a wide range of interactive services including home shopping and Internet communications using set-top boxes which will soon be built into standard television sets.
Similarly, the next generation of digital mobile telephones will include technology that will enable users to send and receive web pages, view electronic mail and conduct online banking as well as make ordinary voice calls. Many of these devices will use the same technology standards and familiar software such as Internet web browsers that has enabled the Internet to grow so quickly.
Predicting the performance of fast-moving technology markets has never been easy. Indeed, the history of the PC industry is littered with the corpses of companies that placed the wrong bets. Today's giants cannot afford to put one foot wrong if they are to survive.
