Quotes of the Day

It's been a grim recession for computer companies. First-quarter PC shipments were down 8.1% from last year's levels and down 14% from the prior quarter. But that's what happens in a recession. The newer data, though, says green shoots are sprouting, with important implications for business and investors.

As this chart shows, the severe drop-off in demand has been punishing. But with technology advancing — and computers aging — the seeds for a replacement cycle are in place. Morgan Stanley's analysts expect the up cycle to start in the consumer segment of the market in the final quarter of 2009, then move on to small-business buyers and finally big corporate buyers in the second half of 2010.

"We believe that global PC shipments are near the bottom (of the cycle) and that we are approaching the beginning of the next, long-awaited PC-replacement cycle," Morgan's report said. Supporting that notion, a release on June 22 from a meeting of the Global Technology Distribution Council, whose member companies handle more than $100 billion in global technology sales, said that "the worst may be over."

Maybe so. But this will be a different kind of recovery for tech companies. One reason is that a key driver of demand in the next 18 months will be smaller and smaller computers. The growing popularity of netbooks — laptops that can easily fit in a briefcase or handbag and offer basic computing tasks, such as Web browsing — are the prime case in point. Netbooks are cheap, and with new, high-efficiency processors on the scene, they will likely get more powerful, and cheaper still. So while unit volume is improving for tech companies, the actual revenue they bring in continues to decline. Sales data from the market-research firm NPD shows that in the U.S., technology unit sales were up 10% in May on a year-over-year basis. However, revenues declined 11% over the same time period. "Most of the unit growth is fueled by netbooks," observed analysts at Bank of America/Merrill Lynch in a recent report.

Of course, the other growth engine for tech is handheld devices, and none is more exciting these days than Apple's iPhone 3GS; the company reports selling more than a million devices in the first three days after the product's introduction. "Customers are voting, and Apple is winning," CEO Steve Jobs was quoted as saying in an Apple press release. It was the first time Jobs had spoken for the company since he went on medical leave in January. Such strength will help offset weakness in Apple's computer business — sales were still declining on a year-over-year basis in May — until the recovery takes hold.

• John Curran
• Tech sales are finally showing improvement, but it's not yet the kind of upturn that's going to generate big profits