My thesis from the beginning and the reason I kept posting so many eMachine articles and comparisons over the last two months is that the mid-range PC is dying. It's being replaced right now with Celeron-based machines and to some extent, AMD-based units, all at substantially lower price points (about 1/2). The Celeron just isn't enough of a difference in performance to justify the greater cost of a PII (the current mid-range PC MPU).
The result of this seismic shift in the PC business is that it will be difficult if not impossible to hold overall pc margins (forget servers and notebooks for a moment) at current levels for the pc majors. For instance, Dell has stated that it wants (and one would assume needs) to raise its market share in the pc world to about 40% over the next 7 years. Most of the pc growth is coming from the sub-$1,000 area and a substantial part from the Celeron units in the 599 - 999 level. For Dell to increase its market share, it knows it must move into that segment in force. Within the last two days, Dell has finally stated just that fact.
However, a growing segment is like a nectar to bees. Compaq will fight tooth and nail in that segment as Drukker indicated he expects in the March BW interview and as CPQ has indicated recently. IBM won't be far behind as it gears up its web site to handle non-Aptiva pc units (pc product sales for IBM last year were about $2.3 Billion and $3.3 Billion overall, so it's a place purchasing managers know about.<g>)
All of this will, IMO, continue to place pressure on DELL's pc margins as it seeks to increase its market share.
Right now Dell is selling an overpriced Celeron, the Celeron 333, for $999 with monitor and 32 MB RAM. I just saw an HP Celeron 366 offered for $999 also, but it includes monitor, 64MB RAM and a color printer. The implication for now is that the Dell offering is overpriced, especially when compared with the EMachine Celeron 333 for $599. How long Dell can continue with this approach remains to be seen. My suspicion is that they can ignore eMachines for a variety of reasons (for now), but that when CPQ decides to shift the battlefield to this segment, change will be forced upon them. I beliee that they know that and are accelerating their attempts to diversify their revenue stream.
This will be a bloody battle. The majors are not going to concede the low-end, especially since the EMachine experience is showing such low return rates and virtually no price protection guarantees (minimal return policy for retailer but so far none coming back, if I recall the interview with Drukker properly). Those lower attendant "costs" are going to attract CPQ and IBM in a major way, IMO.
Oh well. Back to my work. Originally I thought it would take about six months for the ramifications of the EMachine business model to be appreciated by the competition and that their reaction time would be somewhat later. Now it appears that the time frame is being compressed by the marketplace and the growing acceptance of low-priced PCs (as opposed to low cost, high priced).
Disclaimer: I really doubt that anything that is posted here or on other threads will affect the price of DELL, given its market cap, shares outstanding and institutional ownership. Thus, my analysis is meant more as a discussion of the PC industry, trends, etc. and how it might affect DELL, CPQ, GTW, IBM and others. As for the stocks, I'll leave the implications to others. I do not have a position in DELL or its options either long or short. Information posted believed to be reliable, but who really knows? |
