IT Hardware
SECTOR REVIEW
Outlook for 2009 and Industry Primer
■
It’s going to get worse before it gets better. After a tumultuous year for the
hardware segment and the global markets in general, we’re hoping 2009 is
going to be far less painful. Unfortunately, we do not believe the hardware
companies have fully telegraphed the potential macro-driven weakness as
well as other companies in the technology sector. As a result, we believe the
early part of 2009—particularly the March quarter—will be marked by further
downward earnings revisions and potentially severe share price
compression.
■
This spring marks the best case for a bottom. As a result, while we favor
Apple, EMC and Dell on a relative basis, we believe we are unlikely to
experience any absolute share price appreciation in the group in the early
part of the year. We are cautiously optimistic that the harsh conditions in the
March quarter will allow expectations to bottom by early spring.
■
A year of “Black Swans?” The historic abnormalities impacting the hardware
industry and the broader economy should produce ideal conditions for many
Black Swans to appear throughout 2009. We discuss nine potential
surprises in this report. These include a takeout of a major hardware
company, a potential contraction in printer consumables sales, and doubledigit
declines in PC prices.
■
In the PC segment, pricing stability and seasonality could fade. Our current
PC unit forecast assumes industry units will decline by 4.5% in 2009. We
forecast total PC ASP declines of 11.5% in 2009, versus 5.5% in 2008 and
0.1% in 2007. Meanwhile, we expect notebook ASPs to decline by 16.8%,
as netbooks account for a larger portion of total units. This contributes to
total PC revenue contraction of 15.5% in 2009.
■
In the enterprise, x86 servers could represent the worst of the lot, with
storage making the sharpest comeback. We expect the enterprise segment
to face a very difficult March quarter, as enterprises hold spending while they
determine an appropriate budget trajectory for the year. We don’t expect
significant momentum to resume until the tail end of the year, but estimates
could bottom by the spring. We expect x86 server revenues to decline by
14.8%, faring worse than other segments. Meanwhile, after a difficult start to
the year, we believe storage revenues could hold flat for the year.

Table of Contents
Introduction 4
A Review of 2008 Performance 4
Our Entry Positioning on the Key Subsectors for 2009 6
Our View on the PC Sector Remains Extremely Cautious 6
With Recent Enterprise Revisions, Industry Assumptions Are Now at Scenario 2 7
Nine Potential Surprises for 2009 9
1. One of the Major IT Hardware Companies Could Be Acquired 9
2. Netbook Subsidies Could Fade by Year-End 10
3. Industry Standard Servers May Prove to Be the Most Cyclical Segment in Hardware
11
4. Storage Spending Could Be the Least Cyclical Segment in Hardware 12
5. PC Prices Could Post Double-Digit Declines 13
Sub-$999 PCs Are Accounting for a Larger Portion of Growth 14
OEMs May Price for Volume, though That May Backfire 15
Netbooks Represent a Key Variable in Our ASP Forecast 15
6. Emerging Market PC Growth Is Likely to Falter 16
7. Dell’s Gross Margins May Hold Better Than Most Expect 17
The Shift Towards Lower-Cost, Fixed Configuration Models Is Well Under Way 18
Dell Appears to Understand the Dangers of Aggressive Pricing in a PC Downturn 18
Mix Shift Benefits Will Still Be Apparent in a Downturn 18
8. Printer Consumables Represent a Critical Wildcard for 2009 19
9. Industry Earnings Estimates May Not Bottom Until After the First Quarter 20
Industry Primer and Long-Term Framework 22
Personal Computers 22
Unit Growth Has Been Healthy Over the Past Decade, though Pricing Tends to
Dampen Revenue Growth 23
The PC Industry Has Recently Experienced Unusual Periods of Price Stability 24
We Forecast Unit and Pricing Pressures 24
The Elasticity of the PC Industry Has Been Statistically Unclear 26
Vendor Market Share Is Elastic 27
The Shift to Mobility Is Eating Away at Whitebox PC Vendors 27
The Historical Evolution of the Optimal PC Distribution Model 28
The Rise of Indirect Distribution: 1981–1995 29
Direct Distribution and “the Dell Effect”: 1996–2003 29
Back to the Future, Hybrid Distribution Reigns Supreme: 2004 to the Present 31
Sources of Competitive Advantage for PC Vendors 33
Apple: The High-Profile Industry Exception 33
Printing 34
Inkjet Printers 36
Laser Printers 38
Printer Economics and Sources of Competitive Advantage 40
Servers 42
From “Big Iron” to Industry Standard 44
Big Iron Servers and the Core of the Datacenter 44
UNIX Servers 44
The Economics of the UNIX Market 45
Mainframes 46
The Economics of Mainframes and Why They Matter 48
Sources of Competitive Advantage in Big Iron Servers 48
Industry Standard Servers 49
The Economics and Sources of Competitive Advantage for the Industry Standard
Server Market 51
Blade Servers: Melding the Economics of ISS and Big Iron 53

HP and IBM Dominate the Blade Server Market 55
Blade Servers Could Represent the Primary Source of Server Revenue and Profit
Growth 56
The Economics of Blade Servers 57
Sources of Competitive Advantage in the Blade Server Market 58
Enterprise Storage 59
Digitized Data Growth Continues to Accelerate 61
Subsystems and Direct Attached Storage 63
The Rise of Networked Storage 64
Types of Networked Storage 66
Network-Attached Storage 69
Unifying SAN and NAS 71
Emerging Technologies 71
The Economics and Sources of Competitive Advantage for Enterprise Storage 74
Disaggregated Computing Necessitates Networked Storage 77