Will Rising Computer Prices
Be The Grinch That Steals
Christmas?
Date :12/08/1999
Author :Nick Turner
Copyright :Investor's Business Daily
It almost doesn't feel like the holiday season
without a flurry of dizzying price drops on personal
computers.
Consumers have grown used to seeing
dramatically lower prices around this time of year.
In 1997, machines costing less than $800 hit the
scene. Last year, sub-$500 PCs emerged just in
time for yuletide.
But this year, the PC price limbo trend may take
the holidays off.
The cost of key components such as memory
chips and graphics boards is on the upswing. And
flat-panel screens, used in laptop PCs and some
desktop monitors, are in short supply.
That means PC makers likely will hold prices
steady over the next quarter or two, analysts say.
Some manufacturers even are passing the
increased costs onto consumers.
No Inventory
Machines that pack a lot of memory may actually
cost more this month than they did in the early fall.
In an industry where the maxim is faster, better,
cheaper, the uptick amounts to heresy.
"Right now the supply-demand equation is on its
head," said Roger Kay, an analyst at International
Data Corp. in Framingham, Mass.
While the PC industry has been plagued in recent
years by a glut of stock, "right now, nobody has
any inventory," Kay said.
A number of events are behind the about-face.
Makers of memory chips, harrowed by years of
oversupply from fast-expanding Asian plants, are
finally back in control of production and prices.
The Taiwan earthquake in September made
matters worse for PC makers. It halted production
at parts plants on the island. The shaking also
served as a signal for various stripes of component
manufacturers to charge more - whether
conditions warranted or not.
"Everybody simultaneously jacked their prices,"
Kay said.
Even before those woes, PC makers had hit a
price floor, analysts say.
The current parts of a computer can't drop much
below $300, they say. Manufacturing costs add
another $100, bringing the break-even price for a
computer to at least $400.
Rebates can further lower price tags, but those
typically just hide costs elsewhere. A popular plan
offered by America Online Inc. refunds PC
buyers $400 - if they agree to spend almost $800
in Internet services.
Technology Premium?
Component makers, meantime, say short supply is
just temporary.
"We did see some tightening of the marketplace,"
said Michael Howse, senior vice president of
worldwide marketing for 3dfx Interactive Inc.,
which makes graphics boards that go inside PCs.
"But that seems to be loosening up."
Still, buyers may continue to spend more for PCs.
Companies such as 3dfx say their latest
technology warrants a premium. When customers
grow weary of low-budget PCs, they'll gladly pay
a bit more for a better experience, Howse says.
In this new atmosphere of stable or rising prices,
PC makers are scrambling to entice buyers.
Rebates are among a host of tactics for dealing
with the change.
Direct sellers of PCs, which largely build
machines to suit orders, say they can easily adapt
to fluctuating component prices.
Officials at the largest direct PC maker, Dell
Computer Corp., concede they may have to pass
on some of the costs of rising memory prices.
Customers, when they see they may have to pay a
bit more for memory, can customize a PC with
fewer such chips, Dell officials say. And they can
compensate in other areas. They may opt for
either a large hard-disk drive or a speedier
processor.
Many computer makers are simply eating the
memory price increases, analysts say. They plan
to make up the money in other areas. Most involve
the Internet.
Dell, Compaq Computer Corp. and others are
aggressively marketing home-networking
products.
As homes are wired to a high-speed Internet
connection, users will want all their computers and
other devices to take advantage of the Net, the
companies figure.
Dell and Compaq hope to pad their profits by
selling the devices and services that form a home
network.
"Our mission is to become the technology
integrator in the home," said Stephan Godevais, a
vice president at Round Rock, Texas-based Dell.
Low-end PC makers likely will look for revenue in
other areas. Fremont, Calif.-based Emachines
sells PCs for as low as $399, which is a
break-even point at best, pundits say.
The company may be able to achieve profitability
by teaming up with electronic-commerce
companies. A deal could involve allocating space
for certain Internet services on its PCs.
That may mean devoting a specific keyboard
button to a Web site. Press it, and consumers will
connect directly to the service.
Or an e-commerce site could be promoted via an
icon on the PC's desktop - the screen users see
before they run a program.
‘$400 In The Hole'
No one's sure if this business model will work, but
Emachines and a company called PeoplePC Inc.
appear to be the front-runners in tying
e-commerce revenue to home-computer sales,
analysts say.
Emachines is getting bigger. On Nov. 30, the
company announced a merger with giveaway PC
company FreePC Inc. of Pasadena, Calif. As the
name implies, it offers free machines tied to
Internet access.
Emachines doesn't plan to give away PCs as a
result of the merger, but it will still offer low-cost
machines.
Unlike Emachines, San Francisco's PeoplePC
doesn't make its own hardware. It simply bundles
a PC with Internet service for a monthly fee of
$24.95 a month. Customers get deals if they shop
at certain Web sites.
Analysts give less of a chance to the hawkers of
free PCs. Low-cost seller Emachines and its ilk
may only break even on its machines, but at least
they aren't starting out $400 behind.
"Once you get $400 in the hole, it's very hard to
make up that money," analyst Kay said. |
