Cheap-PC Sales Are Growing Fast,
But Is Overall Market Expanding?
December 11, 1997
By MARK BOSLET
Dow Jones Newswires
PALO ALTO, Calif. -- At Intel Corp.'s fall analyst day last month, sales executive Paul Otellini tried to take some air out of the market for low-priced computers.
"There's no conclusive data that sub-$1,000 computers are expanding the market in the U.S.," Mr. Otellini, executive vice president of sales and marketing, told a collection of the industry's top analysts.
Still, the Santa Clara, Calif., chip giant has no deflated intentions when it comes to competing. Controlling 90% of the market for machines selling at $900 to $999, and 65% of the market for computers that sell for less than $900, Intel is "going to continue to focus on this market," Mr. Otellini said. "It is important to us."
The market is equally important to the rest of the computer industry -- and just as closely watched. Despite all this attention, there is a broad diversity of opinion on what the market is doing. Is it drawing in new buyers otherwise unable to afford a computer purchase? Or is it stealing sales from higher-priced machines?
Fast Growing Segment
Nearly a year after the sub-$1,000 market began to take off, the segment continues to be the fastest growing category of personal computer. According to PC Data Inc., a market research firm, sub-$1,000 computers made up 39.1% of retail PC sales in October, up from 7.1% of sales a year earlier.
And during the same period, sales of $1,500 to $2,000 machines slipped to 20.3% of the market from 37.9%. Machines selling for $2,000 to $2,500 fell to 4.2% from 16.4%.
But Mr. Otellini is right. When it comes to evidence that these inexpensive and still very capable machines are broadening the market in the U.S., conclusive data are hard to find.
Still, the question is a key one. If more households are buying computers, enticed by low price, the impact on companies such as on-line service provider America Online Inc., for instance, and networker 3Com Corp., which sells modems, could be significant.
Microprocessor makers such as Intel, Advanced Micro Devices Inc. and
National Semiconductor Corp., which recently bought chip maker Cyrix Corp., stand to benefit -- or at least see changes to their business models -- as well. More computers mean more chips. But cheaper machines also mean lower chip prices.
As it is, Intel has already cut the price of its latest generation Pentium II significantly, and analysts expect more cuts in February and May.
Other Views
Researchers weigh in across the board. Some agree with Mr. Otellini that low-cost machines haven't appeared to expand the market. Others are convinced that penetration of U.S. households is going up.
One thing seems clear, however: Prices will continue to come down next
year.
Because of the price category, "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 Dataquest Inc. Mr. 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 Mr. Miller, who notes that a Dataquest study in progress should prove or disprove his penetration forecast.
More PC Penetration?
Also studying the issue is Bill Ablondi, an International Data Corp. analyst. Mr. 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
personal computer, up from 20% at the end of last year.
"I think we will find concrete evidence that this is expanding the market," Mr. Ablondi said. "My gut is telling me the $1,000 price point is grabbing their attention [even if they are] going to go in and spend more."
One often overlooked consequence, Mr. Ablondi added, is that the
sub-$1,000 machine is eating into the market for used computers.
Rob Enderle, an analyst at Giga Information Group, said he believes
penetration has already climbed a few percentage points this year and may rise to as much as 50% by the end of 1998.
But not everyone agrees. "Intel is correct. 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.
Quicker Upgrades
But the category is expanding the market. These less expensive machines have encouraged current computer owners to more quickly upgrade old machines or to get second machines, Mr. Merrin said.
What has made the sub-$1,000 market so compelling this year is rapid
improvement in these low-cost machines, a trend enabled in large part by the decline in prices of many PC components, such as DRAM (dynamic
random-access memory) 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 users.
And the market quickly became "much bigger than anybody thought it was
going to be," said James Penhune, an analyst at 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.
One sign of how important the market has become is the rush of new
entrants. 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.
More Price Cuts
Analysts also are convinced that prices will fall again next year. After years
during which computer prices remained largely stable, and new features and
power were added to make the computers more attractive, 1997 brought a
drop of about $500 in every price point, said Kevin Hause, an analyst at
IDC.
Next year, prices won't drop as sharply, Mr. Hause said, but today's
low-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]," Mr.
Rhinelander said. "It is cutthroat." |
