If you have not read this, I highly recommend that you do. It's regarding the coming competition for emachines and some analyses of the growth rates for your favorite box company.
businessweek.com
However, as the end of this link is "today," I have doubts that it will survive to Monday. Oh well . . . I love the BusinessWeek site.
Compaq and Its Buddies See the Future, and It Has a Cheap Price Tag
The sub-$600 PC market may have minute margins, but the Big Guys aren't about to surrender it to upstart emachines
Top-tier PC makers, stung by falling prices and margins, know they've got to find more lucrative new businesses like powerful back-office servers, computer services, and storage networks. Does that mean they're backing away from selling low-priced PCs? Not at all.
Indeed, the low-price fun is just beginning. Dell Computer Corp., which has pooh-poohed the sub-$1,000 PC trend since it began in mid-1997, recently unveiled its first entry -- a $999 (with monitor) Dimension V model with a 333 MHz Intel Celeron processor. And Gateway is looking to make sub-$1,000 PC sales a bigger part of its revenues, now at under 10% of total sales, says Chief Financial Officer John Todd.
Some plan to go even lower. Heavyweight competition is coming soon for startup emachines Inc., which has grabbed 60% market share in the booming sub-$600 market, according to ZD Market Intelligence. By May, CompUSA will sell a $600 version of its house brand American Pro PC, says CEO James F. Halpin. And mighty Compaq Computer Corp., the overall PC market-share leader, won't be far behind. "Just as we pioneered the sub-$1,000 market, we're not going to leave this market untouched," says marketing chief Enrico Pesatori. "Compaq is much more than a PC company -- but we have zero intention of relinquishing our No. 1 position."
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Even as they try to build alternative markets, PC makers have to keep selling PCs like there's no tomorrow
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Why chase this low-margin market? After all, it has hardly been kind to income statements. Despite zippy 23.5% unit volume growth in PCs for the fourth quarter of 1998, revenues in the U.S. home PC market shrank 10%, says Dataquest Inc. analyst David Stremba. The problem is that PC makers know they won't be able to build new businesses fast enough to meet Wall Street's expectations -- and so they have no choice but to keep the pedal to the metal on PC sales.
That presents a dilemma. Consider Dell, whose stock, some say, already is overvalued for what's ahead, given falling prices. Should the average price of its PCs slip 10% a year -- not out of the question, say analysts -- the company would bring in just $1,290 per PC in 2003. That would mean fewer dollars of profit per unit. So the only way to deliver the overall profits Wall Street expects would be to crank up unit sales to a record-breaking level -- a compounded rate of 33% a year, says Holt Value Associates, a financial consultant that specializes in determining the share value of earnings over time. Such a rate would take Dell from $18 billion in revenues in its 1999 fiscal year, which ended in January, to $78 billion in five years.
"BET AGAINST" DELL? That's a daunting goal in itself. But at such low unit prices, Dell would have to sell a mind-numbing 60 million units, which, even assuming continued brisk demand, would give it a huge market share of 33.4%, compared to its 7.9% last year. "Of the 6,000 companies we've tracked over the past 50 years, no company of similar size has achieved such staggering growth for such an extended period of time," says Sam T. Eddins, Holt's head of research. "I'd have to bet against them."
That's why PC makers are desperately seeking ways to get more dollars out of customers who buy its low-end machines -- whether that's through service contracts, a share of monthly Internet service bills, or tiny markups on books and other merchandise sold via its computers by electronic-commerce partners. "The key is diversifying [your] income stream, so you're making money on something besides the box," says Gateway's Todd.
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Note to emachines' Dukker: Compaq Chairman Eckhard Pfeiffer is not your typical old-guard executive
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Whether PC makers can make the jump to this new model is an open question, but this much is clear: emachines' will have to defend its status as the uncontested ruler of the sub-$600 market. With no other name-brand products in the $400 to $600 price range, retailers are now beating down the doors of emachines CEO Stephen Dukker.
But it's usually just a matter of time before the Big Guys take on upstarts -- and Compaq Chairman Eckhard Pfeiffer is not your typical old-guard executive. He became CEO of Compaq by slashing prices 35% to 50% in 1992, a move that triggered a price revolution in the PC industry and made Compaq the market-share leader. "He did it once, and Dukker might be wrong to think he won't do it again," says CIBC Oppenheimer analyst James D. Poyner, Jr. "Eckhard may recognize this fast-growing new weed, and try to eradicate it before it becomes a tree."
Then the question becomes: Will Compaq stunt it's own bottom line in the process?
And finally:
IBM also plans to get products to customers much faster. The company will expand a program dubbed Quick Step, which guarantees delivery within 48 hours. So far, the program is available only for memory chips, disk drives, and other products to upgrade PCs. Anderson says IBM will broaden the program by yearend to handle about 1,800 products including PCs, notebooks, and servers. He says customers using Quick Step will be able to process an order within 20 minutes, vs. the 48 hours it takes for an IBM salesperson to do that and get the customer a shipping date. |
