Hi El: Long time no meet. I've been on vacation and then computer-less for over a week. I found some articles from TSC that reference CPQ to post, but I haven't had time to catch up on the CPQ thread posts, so maybe some of this stuff is already here.
K
Unlike PCs, Success Doesn't Come Cheap for Boxmakers
By Eric Moskowitz
Senior Writer
6/11/99 3:00 PM ET
At this week's PaineWebber Growth & Technology Conference, Dell (DELL:Nasdaq) Vice Chairman Kevin Rollins said he was optimistic about the PC business because pricing had become "rational."
Is he talking about the right industry?
After all, personal computer prices currently range from free models that offer the bare minimum (courtesy of Free-PC) to $2,500 super-powered boxes with a 500-MHz Pentium III, 128 megabytes of RAM and 10-plus gigabytes of hard-drive space. That disparity may not seem all that rational to investors, who have become increasingly hesitant to embrace computer hardware companies this year. But established hardware makers are learning new tricks to deal with falling prices and new challengers.
This year, the established boxmakers have been forced to respond quickly to challenges from start-up companies, such as Free-PC and eMachines, that want to build market share at any cost, offer super-cheap models and are satisfied with razor-thin profits.
The leader of the cheap PC invasion seems to be eMachines, which has used a savvy marketing campaign to sell PCs for a low $399. Almost overnight, eMachines has become the No. 4 retail seller of PCs in the U.S. Not too shabby considering the company, which is co-owned by Korean PC manufacturer TriGem and Korea Data Systems, was only founded in September 1998.
From Nowhere, eMachines
Becomes a Player Overnight
U.S. PC market share for first quarter 1999
Chart appears here - can't reproduce
Source: International Data
Still private, eMachines is now being courted by brokerage firms on both coasts for a possible IPO. Talk about a quick business plan. Credit Suisse First Boston's Frank Quattrone appears to be out in front in this race, according to a source close to the proceedings. Hambrecht & Quist, BancBoston Robertson Stephens and Morgan Stanley also are reportedly involved in the talks. An eMachines spokeswoman declined to comment on the talks, and CS First Boston didn't return calls seeking comment.
But even more threats to the PC titans are on the horizon. Microsoft (MSFT:Nasdaq) is mulling a plan that should scare the bejeezus out of the computer hardware industry. The software giant will soon offer free PCs through a computer store chain called MicroCenter if customers sign up for the Microsoft Network at $20 a month for at least one year.
The aforementioned Free-PC, a private company based in Pasadena, Calif., offers free computers in exchange for detailed personal information and constant advertisements from sponsors.
The continuing price deflation will squeeze profit margins among the top five PC makers Compaq (CPQ:NYSE), Dell, Gateway (GTW:NYSE), IBM (IBM:NYSE) and Hewlett-Packard (HWP:NYSE). Presently, the Windows-based companies are moving into everything from providing Internet access to disparate product lines (storage, servers, peripherals) to try to make up margins elsewhere.
Gateway, for example, offers free Web access through its own Internet service if you buy a PC that costs more than $1,000, but it hopes to never end up giving away PCs. Dell, which excels at selling PCs to large corporate and government entities, is offering free Internet access to its customers in Europe under the name DellNet as an added bonus.
Hardware makers are also adopting the tactic of highlighting the poor quality of cheap PCs. While eMachines did sell 300,000 PCs in the first quarter, giving it 3% of the total U.S. market, the big PC manufacturers say buyers aren't getting enough value. "If you add up all the extras -- monitor, an external disk drive and everything else -- customers are slowly going to come to the realization that it isn't such a good deal," says Roger Kay, an analyst with International Data. eMachines' $399 computer has neither a monitor nor a disk drive and is equipped with a 333-MHz Cyrix processor, 32 megabytes of RAM and a 2.1 gigabyte hard drive.
Gateway is currently running a nationally televised ad that says an ultra-cheap eMachines or competing Microworkz computer actually costs more than $1,200 once all the extras are included, compared with $999 for a Gateway PC.
But even that price level for Gateway may not last long. Gateway CFO John Todd said recently the company plans on aggressively entering the sub-$800 space with a computer that "will be significantly more robust than the low-end alternatives." Hewlett-Packard already has a number of models in the $800 to $900 range, such as the H-P Pavillion PC, which costs $899 and comes with a 400-MHz Celeron processor, 64 megabytes of memory and a 6.4 gigabyte hard drive. The monitor is extra as with the eMachines product, but H-P includes a CD-ROM drive, a fax modem and stereo speakers.
Boxmakers also are touting their range of services and customer support after the sale. "What does eMachines offer, 15 days of tech support? I mean come on," Duane Zitzner, Hewlett-Packard's Personal Systems Group CEO, said recently. H-P provides one year of hardware support and 30 days of software support, along with a lifetime of online support, says an H-P spokesman. Compaq, Dell and Gateway offer similar packages. eMachines offers 15 days of customer support but charges $20 per incident thereafter.
Selling cheap PCs, however, is fraught with whisper-thin margins and little room for poor execution. NEC's Packard-Bell, for example, ruled the low-end PC market for more than two years but failed to upgrade its machines to offer the latest microprocessors, and rivals like Compaq leapfrogged ahead.
While Dell and Gateway Zoom, Packard Bell
Continues to Slump
U.S. PC year-over-year unit growth 1Q99
Chart appears here - can't reproduce
Source: International Data
The low-end price fight can be an unprofitable road to take. IBM (IBM:NYSE) managed to lose $1 billion in its PC division last year, and Compaq's woes led to the ouster of its CEO.
For investors, the PC space has become a minefield where even former superstars like Dell are accorded no respect. Until the PC makers offer credible ways to boost profit margins, investors may continue to stay away.
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