An article in the 09/10/97 WSJ reports that consumer multimedia PC penetration is increasing. They mention how this will spur electronic commerce, but of course multimedia/entertainment software is the other obvious beneficiary.
(from the article)
"... in the second quarter, sales of the PCs really boomed, resuscitating what had been stagnant consumer demand for personal computers. "
(full text)
PCs Selling For Under $1,000 Are Shaking Up The Industry
Dow Jones Online News, Wednesday, September 10, 1997 at 01:09
By Jim Carlton and Evan Ramstad
Staff Reporters of The Wall Street Journal
The arrival of PCs selling for under $1,000 is creating a new market
of buyers that could change the computer industry's economic model.
The cheaper machines are likely to spur electronic commerce, which
needs more PC users with modems to get off the ground. At the same time,
they're starting to squeeze the profit margins of PC makers and big
suppliers.
Signs of consumer interest in the sub-$1,000 category were clear
early this year, but in the second quarter, sales of the PCs really
boomed, resuscitating what had been stagnant consumer demand for
personal computers. Packard Bell NEC Inc., the leading maker of home
PCs, says that its two top-selling models are priced below $1,000 and
that the segment now accounts for 30% of its retail sales. Compaq
Computer Corp. says its second hottest retail seller in June was its
$999 Presario 2100.
In a short 16 months, low-priced models have come to account for
nearly one-third of all U.S. retail PC sales, according to estimates by
the market research firm Audits & Surveys Worldwide Inc. in New York.
Largely as a result, second-quarter home-PC sales jumped 16% from a year
earlier after no growth in the first period, the firm says.
"What we are really seeing now is a choice where people can buy from
either the low end or the high end of the market," says Carl Ravitch,
Audits & Surveys' executive vice president.
Randy Deutsch is one of the new low-end buyers. Until last spring, he
owned a largely obsolete PC but was willing to wait several more years
before upgrading to his "dream machine."
Then, cruising a Best Buy store, the Sarasota, Fla., computer
technician spotted a $999 Packard Bell machine packed with some of the
latest technology, including an Intel Corp. Pentium microprocessor and
an expansion slot for video input. Mr. Deutsch bought it as an interim
computer, to do video conferencing on the Internet. And he still plans
to buy that dream machine in a few years when new graphics technology
becomes more widespread.
"That sweet spot of $999 was something I couldn't resist," he says.
The trend promises big changes for both the PC industry and retailing
via the Internet. The penetration of PCs in U.S. households was stalled
recently at 38% to 40%, depending on who was doing the survey. Only
about half of those households had modems that connected or were capable
of connecting to the Internet, limiting electronic commerce on the Net's
World Wide Web.
But in a report last fall, Forrester Research Inc. predicted that PC
penetration could reach 53% by 2001, mainly because of the expected
popularity of sub-$1,000 PCs among lower-income households.
The surge in low-cost computer sales could hammer the industry's
profit margins. Since January, the average selling price of a retail PC
has fallen to about $1,400 from $1,500, according to Audits & Surveys.
Meanwhile, corporate buyers are starting to demand much cheaper and
simpler PCs for their networks. Kevin Hause, an analyst for
International Data Corp., Framingham, Mass., estimates that margins for
sub-$1,000 machines are 10% to 12%, compared with "the high teens to low
20s" for more expensive desktop computers.
The real impact won't be known for a year or so, when the industry
can see whether unit-sales growth and penetration rates are above
expectations. But so far PC makers are optimistic that they can make up
for lower prices with increased volume.
AST Research Inc., a money-losing vendor in Irvine, Calif., pioneered
the market with a $999 model introduced through Wal-Mart Stores Inc. in
April 1996. Even though the machine was equipped with an out-of-date
Intel 486 processor, AST shipped 160,000 units to Wal-Mart by Christmas.
In a Thanksgiving promotion, Wal-Mart sold a staggering 35,000 units in
five hours. Many of the sales were to first-time buyers, AST executives
believe.
"There's no question it expanded the market because we tapped into
households that could not previously afford a PC," says Terry Baker,
AST's director of product planning.
Plummeting component prices, especially for memory chips and hard
drives, allowed competitors to follow AST with more powerful machines.
In January, Packard Bell jumped in with the first $999 model equipped
with an Intel Pentium. The company believes that half its customers for
the machine are first-time buyers.
In February Compaq, the world's biggest PC maker, introduced a $999
model, and then, in June, a $799 machine. It recently upgraded its $999
offering with the Presario 4504, which has a fast 200-megahertz Pentium,
a big hard drive, a high-speed CD-ROM drive and a telephone modem
(Compaq's prices don't include monitors, which sell for as little as
$200 each.)
Michael Heil, senior vice president of Compaq's consumer products
group, says first-time buyers outnumber those replacing or adding PCs.
"We haven't seen (cannibalization) in a statistically significant way,"
he maintains.
Since then, other vendors have introduced sub-$1,000 computers
without monitors, including Taiwan's Acer Inc., whose Acer America Corp.
unit on Aug. 4 shipped two Aspire models priced at $799 and $999,
respectively, and Hewlett-Packard Co., which shipped an $899 Vectra
early in the summer.
Acer's marketing approach offers a twist. Its models allow for
upgrading to Intel's newer MMX chips, which incorporate multimedia
technology, and other enhancements.
"Our strategy is if we can get a customer in for $1,000, then, in six
months, we will market to them upgrades such as MMX," says Mike Culver,
vice president and general manager of Acer America's consumer division.
"Customers may end up spending $2,000 over the next three years, but not
all at once and through upgrades."
Right now most of the industry seems opposed to that approach for
fear of encouraging cannibalization. Bill Coulter, manager of
information systems for Cura Group Inc., a consulting firm in Mt.
Laurel, N.J., tried in July to upgrade two Presario 4504 models to run
Microsoft Corp.'s most powerful operating system, Windows NT. He was
told by Compaq's support line that he had violated the warranty by
loading NT on the machines, and that he wasn't supposed to run NT on
them.
After installing network cards and more memory to get NT to work, the
machine's CD-ROM drive failed, so he finally settled for running Windows
95, an operating system less suitable for networks, on the machines.
"The frustrating thing is this is such a great price for a computer
that's really very similar to what's going on the market for $2,000 or
$2,500," Mr. Coulter says. "Apparently, if we're going to use Windows
NT, they want us to have a much more expensive piece of hardware to put
it on."
A Compaq spokesman denied that the company was trying to protect
sales of more expensive PCs. He noted that a $999 machine in the
company's Deskpro brand line can run Windows NT. That model, however,
lacks many of the Presario's consumer friendly features and isn't sold
in stores.
Copyright (c) 1997 Dow Jones & Company, Inc.
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