NEW YORK -(Dow Jones)- Conclusive data are hard to find when it comes
to determining whether low-cost personal computers, the fastest growing
category, are broadening the overall market.
PCs priced less than $1,000 are exepected to be the hit item during
the crucial holiday season this year. But there is a broad diversity of
opinion on whether the sub-$1,000 machines are drawing in new buyers who
otherwise would be unable to afford a purchase or whether the newer
models are stealing sales from higher-priced machines.
Prices for PCs, software and peripherals are falling but PC makers
and some experts have been repeating a mantra: growth in unit sales will
more than make up for the price drops to make this year's holiday season
a jolly one for the computer industry.
Computers that cost less than $1,000 have been very popular in recent
months and should continue to be so during the holidays. Sub-$1,000
models have been attractive to both first-time buyers and seasoned users
who want a second or third computer. The computer market is offering a
greater selection of products for all pocketbooks this year, from the
low-end Pentium MMX systems and equivalents to Pentium II systems.
But the cheaper machines represent a venture onto treacherous ground
for PC makers because models selling for less than $1,000 have only
around a 10% gross margin compared with the 25% margin of a $2,500
machine. The tight margin means any unforeseen expense, like a
disproportionate amount of expensive customer support calls, can sink a
manufacturer. An average support call costs a PC maker $25 to $50 to
process, according to some estimates.
According to market-research firm PC Data Inc., sub-$1,000 PCs
accounted for 39.1% of all retail PC sales in October, up from 7.1% of
sales a year earlier. During the same period, sales of PCs priced $1,500
to $2,000 slipped to 20.3% of the market from 37.9% a year ago. Machines
selling for $2,000 to $2,500 fell to 4.2% from 16.4% a year ago.
Because of the low-cost machines, "we're seeing new buyers come into
the market," even if about half of them eventually settle on slightly
more expensive machines, said Scott Miller, an analyst at reserch outfit
Dataquest Inc., a unit of the Gartner Group. Miller said household
penetration in the U.S. appears to be moving to 41% this year from 35%
to 36% at the end of last year. Without the sub-$1,000 price segment,
penetration this year would have reached only 37.5%, said Miller, who
said a Dataquest study is being prepared to prove or disprove his
market-penetration forecast.
Also studying the issue is Bill Ablondi, an International Data Corp.
analyst. Ablondi projects penetration should hit 43% this year, from
IDC's calculation of 39.4% at the end of 1996, and that low-priced
machines are one reason for the growth. Also of note, about one-third of
households will have more than one PC, up from 20% at the end of last
year.
"I think we will find concrete evidence that this is expanding the
market," Ablondi said. "My gut is telling me the $1,000 price point is
grabbing their attention." One often overlooked consequence, Ablondi
added, is that the sub-$1,000 machine is eating into the market for used
computers.
But not everyone agrees. Paul Otellini, a sales executive at chip
giant Intel Corp., last month said "there's no conclusive data that
sub-$1,000 computers are expanding the market in the U.S."
"The sub-$1,000 computers are not bringing a significant number of
new users into the market," said Seymour Merrin, president of Merrin
Information Services Inc. But Merrin said the models are expanding the
market because they have encouraged current PC owners to more quickly
upgrade old machines or to get second machines, Merrin said.
The question is key for a variety of industries besides the chip and
PC sectors. If more households are buying computers, the impact on
on-line service providers, peripherals makers and other companies could
be significant.
A recent survey by market-research firm Odyssey LP found that many
potential PC buyers are more interested in computing power than in
price. Because of that, Odyssey said the PC industry might not attract
enough new customers to make up for the reduced profit margins
associated with the lower-priced PCs.
Odyssey estimates a maximum of 1.5 million more PCs will be sold at
the sub-$1,000 price than would have been sold at traditional, higher
prices. The success of sub-$1,000 PCs depends on their ability to
attract new customers, since the lower price point necessitates greater
sales volume to make up for reduced profitability.
"There is no doubt that these new systems are selling," Odyssey said,
"but, it's clear that PC manufacturers won't be able to attract enough
new customers" to make up for the squeezed margins.
The oft-quoted $999 price typically doesn't include a monitor, which
usually goes for $250 and more. Some market watchers say the success of
the sub-$1,000 category suggests that consumers are starting to consider
PCs as home-electronics appliances.
One thing seems clear, however: Prices will continue to come down
next year. What has made the sub-$1,000 market so compelling this year
is rapid improvement in the machines, a trend enabled in large part by
the decline in prices of many PC components, such as memory chips, and
the introduction of low-cost microprocessors to compete with those from
Intel. The gap in performance between higher-priced and lower-priced
machines has become nearly imperceptible for many mainstream users.
The market quickly became "much bigger than anybody thought it was
going to be," said James Penhune, an analyst at the Yankee Group. Market
studies show that buyers of sub-$1,000 machines are split between
first-time computer owners and people purchasing a second machine for
the home or, perhaps, to outfit a student for school.
During the past few weeks, both International Business Machines Corp.
and Hewlett-Packard Co. have introduced models as they race to catch up
with pioneers Compaq Computer Corp.. AST Research Inc. and Packard Bell
NEC Inc. in the low-cost category.
Market watchers are convinced that prices will fall again next year
but Kevin Hause, an analyst at IDC, said prices won't drop as sharply.
Hause said today's lowest-end price of $799 will bring a machine with
higher performance.
The $799 price will be common this time next year, agreed Tom
Rhinelander, an analyst at Forrester Research Inc. Computer makers "are
going to be playing a game of chicken out there (with price),"
Rhinelander said. "It is cutthroat." Already, one computer distributor,
Micro Center, a unit of Micro Electronics Inc., has been offering a
machine with its brand name and a Cyrix chip for $499. In 12 months,
some major vendors may match that price, said Miller, the Dataquest
analyst. |
