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Technology Stocks : PC Sector Round Table

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To: Yogi - Paul who wrote (389)	5/21/1998 4:53:00 PM
From: Pierre-X	Read Replies (2) of 2025

Re: Component Proportions Recently I worked up an analysis of this very question. It turns out the proportions are very different for high-end machines vs. low end. Low end machine: 24% 15" Monitor 19% 2G HDD 13% CPU 10% 430TX Motherboard + 512K L2 High end machine: 25% 17" Monitor 20% CPU (Slot 1 includes L2) 15% 8G HDD 6% 440LX Motherboard The key here is that the CPU and the HDD trade places. There is an interesting lesson I find here. One part of Milton Friedman's Theory of Component Elasticity is that components that are a smaller proportion of total cost are less elastic. Translation from economic jargon: when buying a $1000 computer, most people wont notice whether the mouse costs $20 or $30 because it's a small proportion of total cost. So theoretically, Intel should be able to extract higher margins in cheap computers because the HDD is substantially displacing the CPU in proportion of total cost. So why don't we see this? Same reason we don't see $30 mice: competition! The same theoretical structure explains cleanly why monitor makers don't make money. The monitor has always been the most expensive piece of the system and therefore the most price-sensitive. A large pantheon of monitor makers -- none of which has any significant differentiating competitive advantage -- makes for low gross margins. The same goes for HDD. The CPUs you referred to earlier -- the Xeon Slot 2 rigs with massive caches, are not pricing with respect to the cost of the cache. The target market segment there -- high end PC servers -- are typically $10,000 + machines. So Intel is taking advantage of precisely the component elasticity effect I'm talking about to crank up margins on this product. There's nothing to stop them from doing so because they have ZERO competition in that market segment. It's actually a beautiful example of microeconomics, and great for INTC investors, too. <g> God bless, PX

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