From Monday, October 4, 1999 Investors Business Daily......
Date: 10/4/99 INVESTORS BUSINESS DAILY
Author: Nick Turner
It's been more than two years since a boom in shipments of under-$1,000 personal computers, and the results so far might seem puzzling.
Companies that once appeared most likely to profit from the cheap-PC trend are struggling. But some of the industry's old stalwarts, many of which were broadsided by the sudden drop in PC prices, are sitting pretty.
Upstart manufacturers such as Microworkz.com Computer Corp. can't meet production goals. Emachines Inc. could be headed for trouble, some analysts say. They see the company's business model as untenable and worry about legal attacks from rivals.
Chipmaker Advanced Micro Devices Inc. also rode the wave of sub-$1,000 PCs. But chip king Intel Corp. fought back, and AMD's retreating.
As the dust settles, some of the companies that are thriving are equally surprising.
Who's Ahead
Sure, most observers expected Dell Computer Corp. would continue to roll along in the sub-$1,000 era, even though it's specialized in selling higher-priced machines to businesses. But few predicted how quickly it would grow in the consumer market.
Gateway Inc., meantime, is challenging for the No. 1 spot in home-computer sales. Both Dell and Gateway sell PCs directly to consumers instead of through retail stores.
'People are more comfortable going direct than before,' said Matt Sargent, an analyst at Infobeads, a La Jolla, Calif., research unit of Ziff-Davis Inc. 'It's not something that just high- end, educated shoppers do. It's something everybody's doing.'
Yet, Dell and Gateway have largely ignored buyers of sub-$1,000 PCs. Both do offer models for $899, but they nudge most customers up to the more expensive fare.
Even as, according to Infobeads, average retail PC selling prices fell to $799 from $1,182 a year ago, Dell and Gateway flourished.
Dell's sales to consumers more than doubled in the second quarter. That's compared with an overall PC growth rate of 27% for that period, says International Data Corp.
Dell plans to get more aggressive in the consumer-PC field. It's begun a marketing campaign aimed at home buyers called 'Dell4me.' New ads tout a softer side of Dell.
With its cutesy name, the 'Dell4me' campaign evokes Gateway's successful 'Your:).'
Consumers are willing to pay more for Dell because they get more, Dell officials say.
'We look at the total value a customer gets out of their PC,' said Klee Kleber, director of consumer marketing. 'Our systems have three-year warrantees and lifetime tech support 24 hours a day, and we have an incredible Web site to support customers. The total experience includes more than the hardware.'
Is $1,200 Low Price?
Apple Computer Inc. is another company that many predicted would get shelled by cheap-PC makers. Apple's cheapest computer is the iMac.
When that machine debuted at $1,299 in August 1998, it was considered a price breakthrough for Apple. Many analysts, though, said the price still was too high. Apple dropped the price $100, but that didn't placate price hawks.
So far, though, charging a premium doesn't seem to have hurt Apple. Unit sales of the iMac rose 40% year-over-year in the fiscal third quarter, ended June 26, Apple says. Excluding a one-time gain, per-share profit rose to 69 cents from 65 cents.
Some analysts say Apple was never in danger of getting stung by the sub-$1,000 PC boom. Its machines appeal to Mac loyalists.
Apple, though, says a good portion of iMac buyers are former users of the rival Windows software from Microsoft Corp. Observers say the unique styling of the iMac and its ease of use have been selling points.
Emachine's eOne could test Apple's mettle. The eOne looks like the iMac but costs just $799. Apple has moved to block the sale of the product, charging Emachines illegally copied its design.
Intel Responds
Other giants ambushed by low-cost PCs now seem to be handling the market segment deftly.
Intel last year had to scramble to come up with a low-end chip. And its first version of the chip, called the Celeron, was poorly received.
Rivals AMD and National Semiconductor Corp.'s Cyrix unit took the offensive. Soon, Intel lost its dominant position in sales of microprocessors for retail PCs.
By February, AMD and Cyrix had captured 58% of the U.S. retail market, says Infobeads.
But Intel fought back. By May, it had regained the No. 1 spot at retail, and it's rising.
The key, analysts say, was Intel's economy of scale. Once it had designed the right product and priced it right, no one could compete with it.
'In a price war, the dominant manufacturer always has a better chance of winning the longer it goes on,' said Rob Enderle, an analyst at Giga Information Group in Santa Clara, Calif. 'It's like betting against the house.' |
