The surprising strength of the PC market this year will not provide PC vendors with a corresponding rise in revenue, according to Gartner.

After initial lukewarm forecasts for the PC market in 2005, Gartner and IDC have reported that unit shipments have risen at roughly the same pace in 2005 as they did last year. However, price cuts appear to be fueling that growth, said George Shiffler, principal analyst with Gartner.

As a result, worldwide revenue from PC sales will only grow 0.5 per cent in 2005, despite projections of a 12.7 per cent gain in shipments, Shiffler said.

Companies like Intel, Apple and HP have posted solid results this year as consumers and corporations have continued to replace their older PCs, often with higher-margin notebooks. Intel's chip factories are running at full capacity, and HP's PC division posted its best quarter last week since the company acquired Compaq in 2002.

Price impacts box-shifters

However, market-share leader Dell's second-quarter results might be a sign of difficulty in store for the PC industry in the second half of the year. Dell missed Wall Street's quarterly revenue expectations last quarter, as it failed to convince customers to upgrade orders to more profitable configurations.

Dell's desktop PC shipments grew by 17 per cent, and shipments of its mobility products grew by 47 per cent, but the company's overall revenue fell short of expectations.

Shiffler said. "People are sensing that growth is about to fall off, and one of the ways you can fight that is by cutting price," he said.

Vendor pain as margins shrink

PCs are notoriously low-margin products. Vendors have been trying to improve margins by focusing sales efforts on notebooks, but the majority of the market is still buying desktop PCs, for now, Shiffler said.

As notebook prices decline, desktop prices fall as well, Shiffler said. PC buyers are getting great values, but vendors are being forced to sacrifice revenue in order to hold onto market share, he said.

"As mobile prices decline, [vendors] have to push desktop prices even lower. There's increasing mobile for desktop substitution, but it's not happening fast enough to aid the overall industry," Shiffler said.

Gartner believes worldwide PC revenue will actually decline slightly in 2006, even though shipments are expected to grow 8.7 per cent.