This appeared in today's WSJ:
June 18, 1996
PC Buyers Are Getting More
For Even Less as Prices Fall
By SEWELL CHAN
Staff Reporter of THE WALL STREET JOURNAL
PC price-cutting has entered a frenzied new phase.
With technological advances accelerating, the costs of
some major computer components, including
microprocessors and memory, have fallen sharply. And
the cheaper parts -- along with continuing strong
competition in the personal-computer industry -- have
spurred some computer makers to cut prices for new PCs
by 40% or more since last fall, compared with the 20% to
25% annual rate of decline the industry has experienced
historically.
"What we've seen in the past eight to 10 months is the
fastest dropping prices in the history of the industry," says
David Prais, director of marketing for Gateway 2000
Inc., the leading mail-order PC seller.
The intense price cutting is a boon to consumers, who are
getting faster, more powerful PCs for less money. But it
has squeezed PC makers' profit margins and poses
particular threats to weakened companies like Apple
Computer Inc., Packard Bell Electronics Inc. and AST
Research Inc. Sapped by weak sales, Digital Equipment
Corp. fled the home-PC market in January to focus on
selling to businesses.
A year ago, a Compaq Computer Corp. PC running on a
100 megahertz microprocessor cost $2,999. Today, a
nearly identical model retails for $1,599, a 47% drop. An
AST Advantage! PC with 16 megabytes of memory that
runs on a 100 MHz microprocessor cost $2,799 last
summer. A computer with those specifications -- and with
a faster modem and CD-ROM drive and a bigger hard
disk -- now retails for $1,699, a 39% drop.
High-end computer prices have also tumbled. Last June,
customers could order a Gateway PC with a 1.6-gigabyte
hard disk, a four-speed CD-ROM drive and a 133 MHz
processor for $4,399. Today, they can purchase a
Gateway with a 2.5-gigabyte hard disk, an eight-speed
CD-ROM drive and a 166 MHz processor for $2,699, a
39% decline.
PC makers aren't trumpeting the lower prices on their
cheaper computers, preferring instead to push more
powerful $2,000 machines, where profit margins are
higher. Most PC buyers today already own one or more
computers and are demanding better performance, not
cheaper models, says Dan Sheppard, AST's vice
president for world-wide product marketing. In fact, the
average price of a PC -- $2,071 as of April -- has
remained relatively constant since 1992, according to
Computer Intelligence InfoCorp.'s StoreBoard Channel
Tracking monthly survey, which follows prices
nationwide.
But the computing performance consumers are getting for
their money is soaring, driven by dizzying price cuts for
four major components: memory, processors, CD-ROM
drives and hard disks.
Prices for dynamic random access memory, or DRAM,
chips have led the way. They have dropped 60% since
January, compared with the usual average decline of 25%
each year. In addition to technological advances, DRAM
vendors overestimated the growth of PC sales at the end
of 1995 and were left with substantial excess inventory
that they were forced to get rid of. The glut still hasn't
been worked through completely, analysts say.
Prices for microprocessors, the brains of PCs, have also
plunged. "The rate at which microprocessor performance
is improving is increasing more rapidly today than ever
before," says Nathan Brookwood, an analyst at
Dataquest Inc. Intel Corp.'s 166 MHz Pentium processor
was introduced in January at $740; the 200 MHz
Pentium, rolled out last week, made its debut at $599.
Like the PC makers, Intel is trying to maintain market
share and profits by keeping prices low but selling high
volumes.
Production of CD-ROM drives caught up to demand last
November, spurring a price war among manufacturers
eager to clear out inventory and resulting in the steepest
price cuts for CD-ROM drives in recent memory. And
though price cuts for hard-disk drives have remained
stable at around 48% a year, manufacturers are "working
on the lowest gross margins," cutting prices to maintain
market share, says Phil Devin, an analyst at International
Data Corp.
The lower prices have bolstered overall unit sales of PCs,
contributing to a rise of between 14% and 15% in U.S.
sales in the first quarter. But the falling prices are adding
impetus to a division among computer makers into camps
of winners and losers. Companies like Compaq and
Hewlett-Packard Co., with their deep pockets and
diverse product lines, are in a better position to ride out
the cuts than some rivals. Companies like AST, Packard
Bell and Apple, all of whom have been hurting lately, feel
the price shock more.
Some computer makers have moved faster than others to
increase sales by cutting prices. Gateway and Dell
Computer Corp. lowered their prices to match falling
manufacturing costs in the first quarter, while Compaq,
AST and Hewlett-Packard have only recently pushed
prices down to track plunging component costs, says
John C. Dean, senior analyst at Salomon Brothers Inc. in
San Francisco.
Price cutting is almost certain to worsen in the fall as the
holiday shopping season approaches and Japanese
manufacturers enter the PC market. "As the technology
moves so quickly, you've got to sell through the shelf,"
says Sean Burke, director of product marketing for
Compaq's Presario line of PCs. "You have got to be
willing to change, sell, make your profit and move on."
Copyright © 1996 Dow Jones & Company, Inc. All Rights Reserved.
My curiosity is about how this is going to affect earnings in what is already a traditionally poor quarter for Gateway. Staying even would be a godsend, but is it possible even for them? Considering the practice Gateway has of not inventorying raw materials, will they find themselves in a squeeze when the current glut of chips dries up and prices rise? It's a field day for consumers right now, but I'd be interested in knowing what Gateway's strategy is going to be for protecting it's profitable 3rd and 4th quarters if they suddenly find themselves faced with rising costs of memory.
Or is it possible that Gateway can ride out the thin profit margins, outlast a few of the competitors who are on shaky ground, and emerge as strong competition for the Japanese who will be entering the market later this year? I think it's a remarkable feather in Gateway's cap that they were able to introduce the Destination system, and there are now a whole slew of "me too's" on the horizon. It's obvious that establishing a strong foothold in high-end systems will be one way of holding on to some better profit margins. |
