Wednesday, 26 February 2003 8:30 am
H-P's first quarter results, announced yesterday after the market closed, provides some excellent insight into what the computer market has become. Although H-P reported a 9% drop in revenues from the year-ago quarter, missing analysts' expectations by $600M, it also reported pro-forma earnings two cents above expectations as a result of cost cutting. In after hours trading as well overnight on European exchanges, computer companies traded lower on the news.

As I have discussed here before, the basic computer hardware business has become a business characterized by relatively fixed levels of demand and falling prices. Every computer company's business plan is to cut costs faster than their revenue declines, thereby improving earnings. This is exactly what H-P reported yesterday. Of course, the computer companies are aggressively going after market share as well, but their main rivals are not likely to cede any. 

I do not believe that this situation has anything to do with Iraq, Korea, or even slow economic growth. It is simply the maturity and market saturation realities of the computer hardware business. These dynamics will not be changed very much as a result of war or peace or improved economic conditions. The only things that will break the pattern are significant new applications of computer power.