Lowering The Bar: Firms Do Limbo On PC Pricing
Date: 3/30/99
Author: Nick Turner for IBD
Only six months old, Emachines Inc. already looks like a grizzled veteran.
The Fremont, Calif.-based PC maker was formed in September to sell cheap personal computers. Starting at $399, Emachines' prices were dramatically lower than the $600-plus price tags attached to most PCs. By January, the company captured the No. 5 spot in the U.S. retail market, vaulting past the likes of Apple Computer Inc.
Now Emachines finds itself in an interesting quandary. The upstart is part of the establishment, defending itself against companies with even more gutsy business plans, such as free PCs. That means Emachines may lose its spot on the discount PC cutting edge.
''You'll see us doing $199 and $299 PC promotions involving Internet service,'' said Stephen Dukker, Emachines president and chief executive. ''But free? I'm not so sure about that.''
Emachines was formed as a joint venture of two South Korean manufacturers. PC maker TriGem Computer Inc. owns 51% of the company. Monitor firm Korea Data Systems owns the rest.
The idea was to target U.S. homes that couldn't afford PC prices. Emachines officials figure 17 million homes fit in that category, or about 20%.
The company also hoped to attract buyers who wanted multiple PCs or were looking to give them away as gifts. Emachines' prices range from $399 to $599. Monitors cost an extra $100.
Emachines has made huge strides in the office-superstore market. It now has the No. 4 share of PC makers in that arena, according to ZD Market Intelligence, a market researcher in La Jolla, Calif. All told, Emachines could sell 1.2 million PCs this year, the firm figures.
But the company's groundbreaking pricing schemes might seem staid next to rivals' plans. Idealab, a technology incubator in Pasadena, Calif., last month announced the first PC giveaway. Through a company called Free-PC Inc. , it will begin handing out 10,000 PCs to qualified applicants in May.
Recipients of the PCs must use the machines 10 hours per month. Advertisements are the company's income source, and they appear on-screen whenever the machines are in use.
Microworkz Computer Corp. , meanwhile, announced plans earlier this month to sell a $299 PC with a year of free Internet access. Since the Internet service alone would cost $240, the PC essentially costs $59, Microworkz officials contend.
Dukker says there's little evidence on-screen ads are effective. Without some recurring revenue, there's no way to make money selling a PC for less than $400, he adds.
These new strategies may work eventually, Dukker says, but he's unwilling to test them himself. And his competitors likely will sell few PCs through these pricing plans, he says.
Free-PC and Microworkz claim their plans will gain acceptance. Free-PC hopes to have one million of its machines in circulation a year from now, says Steve Chadima, the company's vice president of marketing.
For now, though, Free-PC plans to distribute 10,000 Compaq Computer Corp. PCs with monitors starting in mid-May. Recipients also will get free Internet access.
Free-PC will cull the names from a list of more than 1.2 million. Word of mouth and press coverage have brought visitors to the Free-PC Web site. These applicants provided a number of demographic data.
The applicants aren't primarily low-income. There are a disproportionate number of candidates earning more than $100,000 a year, Chadima says.
Still, PC recipients will be chosen to create a representative sample of all U.S. consumers, Chadima says.
Free-PC will load ads on to the machines before they're shipped. Each PC will have 4 gigabytes of hard- disk drive space, two of which will be taken up by ads. The commercial messages will be updated via an Internet connection.
Ads will be targeted according to demographic data, making them more effective -and more lucrative -for Free-PC, company officials hope.
But it's too early to take all this seriously, analysts say.
''So far, it's a lot of smoke,'' said Steve Baker, analyst at PC Data Inc., a research firm in Reston, Va.
Ads on Web pages have provided some precedent, but not much, he says.
''Advertisers are trying to figure out where their bang for the buck is,'' he said.
Microworkz has rallied against the advertising-based business model. Its plans to sell a $299 PC aren't much more realistic, analysts say. A quick look at component costs puts even the most basic PC at close to $400, they note.
Microworkz officials say parts producers such as chipmaker National Semiconductor Corp. are cutting the company special deals. Microworkz also expects fatter margins on its $499 and $699 PCs, prompting some analysts to call its $299 PC little more than a loss leader.
Microworkz President Rick Latman says the company simply saves money by not selling through the retail channel.
''We're direct,'' he said. ''We don't have to pay resellers the way Emachines does.''
That's fine, pundits say, but retail outlets provide a lot of exposure. Selling only via the phone and the Web, Microworkz may take a while to build up demand.
Emachines isn't worried about a flood of Microworkz PCs hitting the market. Seattle-based Microworkz can't produce enough machines to be a significant player, Dukker says.
So far, Dukker only sees one way to sell PCs for less than $399. It's what he calls the 'DirecTV' model - named after the satellite-television company.
Under that plan, Emachines would sell a PC for $200 or $300, if the buyer signed up for a two or more years of Internet service. Emachines would get a cut of the revenue from the Internet service provider.
But even this model has raised questions. What happens if customers break the contract and sign with another Internet-service company?
''No one knows,'' Dukker said. ''These dimensions of the model haven't been worked out.'' |
