| | PC Makers Race To Stay Ahead Of Falling Prices,ProtectProfit
BY PATRICK SEITZ
INVESTOR'S BUSINESS DAILY
Personal computer unit shipments are rising again, but PC market revenue continues to shrivel.
At their peak in 2000, worldwide sales of desktop and notebook PCs totaled $201.8 billion. In 2001, sales fell 14% to $172.6 billion and last year dipped another 10% to $154.7 billion, says market tracker International Data Corp.
Falling component costs and stiffer competition among PC makers fueled the price declines in 2001. Component prices stabilized last year, but price competition remains strong. And changing buying habits are a big factor in the decline of PC prices, analysts say.
Shoppers lately have been more interested in lower-priced PCs. They might not have the fastest processors, best graphics cards or biggest hard-disk drives, but their features are more than enough to meet buyers' needs.
What does this mean for computer makers? More price competition and pressure on profits.
PC makers are fine-tuning their businesses to wring more profit from lower-priced PCs. They're also building more high-end specialty PCs for niche markets. And they're bundling services and other products with PCs for a more profitable sale.
Quick To Adjust
Dell Computer (DELL) has been faster to adjust to pricing trends than its rivals, analysts say. It's used its direct sales, build-to-order business model to better control costs and undercut rivals during the downturn, analysts say.
"Dell stays ahead of the game by driving cost and price (reductions) at the same time, to squeeze the other players," said IDC analyst Roger Kay. "They've pretty much got that model clocked."
About 18 months ago, Dell launched an effort to cut production costs. Since then, it's trimmed $1 billion in costs, much of it from manufacturing, says Michael Farello, a vice president in Dell's Americas unit.
That effort let Dell boost its operating margin — operating income divided by sales — to 8.4% for its fiscal fourth quarter ended Jan. 31 from 7.4% a year earlier, even as prices fell.
Farello makes another point. Just because PC prices are falling, he says, doesn't mean Dell is getting less revenue from its business customers. Many companies buying cheaper PCs spend the savings on other Dell products, such as servers and storage computers.
"In some ways, we actually view (PC price) reduction more as an opportunity," he claimed.
The PC market is mature and saturated. Still, there are business opportunities for vendors, says Steve Baker, an analyst with retail tracker NPD Techworld.
For instance, privately held Alienware Corp. succeeds in selling high-end, custom-built PCs for computer gamers, Baker says. Another privately held company, eMachines Inc., has found a profitable niche selling low-priced desktop PCs at retail, he says.
In February, 70% of PCs sold at retail went for under $800. EMachines' PCs start at $399. The firm keeps prices down by using lower-cost components and not loading its PCs with extra features.
Looking For Value
Consumers are looking for "good-enough value," Baker said. "The mass of consumers don't see any value in going from a 2.2 gigahertz (processor) to a 2.8 GHz (processor), or they don't see why they need an 80-gigabyte hard drive when 40 gigs seems like plenty."
At the same time, high-end specialty PCs are selling well, says Baker, just not in large volumes.
Hewlett-Packard (HPQ) has succeeded selling pricey machines such as its Media Center and Tablet PCs to counter the trend toward commodity PCs. HP also has been working to sell more of the low-priced PCs.
For instance, HP this month unveiled a line of PCs starting at $599 for small and midsize businesses. The PCs, sold under the Compaq Evo brand, come with a small and midsize business edition of Microsoft's (MSFT) Office XP software.
"Our pricing is the most competitive it's been in years," said John Thompson, vice president and general manager of HP's Personal Systems Group.
HP has been able to cut PC prices by passing along savings it realized from its merger a year ago with Compaq Computer, he says. The combined firm has saved money in such areas as supply chain management, inventory control and material costs, he says.
HP has been able to offset some PC price declines by bundling services and products like handheld computers in large sales to corporate customers, Thompson says.
One factor offsetting the competitive pressure is the fact that price erosion has been more dramatic in the U.S. than abroad.
The average desktop PC last year cost $992 in the U.S. and $1,027 worldwide, says IDC. The average notebook computer cost $1,474 in the U.S. and $1,639 worldwide.
Since 1999, the average selling price for a desktop computer in the U.S. has fallen 34% vs. 28% worldwide.
Worldwide PC unit shipments fell 4.1% in 2001 vs. 2000 — the first-ever annual decrease in unit shipments. Global PC shipments rose 1.4% last year. The gains continued with a 2.1 % first-quarter rise, IDC reported. |
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