17:35 ET 'REPLACEMENT' PCS TO DOMINATE HOLIDAY SALES
Oct 20, 2000 (Tech Web - CMP via COMTEX) -- So who's going to buy a PC this Christmas? Chances are, somebody that already owns one.
With the PC market growing ever more saturated, vendors expect this season's sales will be driven by so-called "secondary" PCs, or supplementary machines for children or other members of the family.
PC makers, therefore, will try to tie those PCs together by offering home networking packages, or capitalizing on the emergence of video editing and PC audio with specific combinations of software and hardware peripherals. But there is no magic formula for a hot-selling PC, they said.
Buying a second PC for the home also doesn't necessarily mean that consumers will seek out the bargain bin, analysts and executives at OEMs said. Both groups expect that home PC buyers will certainly purchase low-end machines to give directly to their kids, but they say about half will buy a high-end machine for themselves, donating the older, slower machine to the household at large.
"I think people will be buying mostly second computers or upgrade purchases at this point," said Stephen Baker, a PC analyst at PC Data, Reston Va., which tracks U.S. retail PC sales. "The U.S. market is saturated to about 50 to 60 percent at this point. It's getting a lot harder to mine these new customers."
But for all the talk about slowing demand, analyst company IDC, Framingham, Mass., still expects U.S. holiday PC sales to grow at steeper rates than in previous years. In 1999, U.S. PC makers sold 12.5 million PCs during the fourth quarter, an increase of 15.7 percent over 1999. This year, IDC expects U.S. PC sales to grow 171.1 percent, to 14.6 million units, during the same period.
The holiday season is assumed to kick off on "Black Friday," the day after Thanksgiving, although PC sales gradually increase starting in October. In a third-quarter conference call of Gateway Inc. (stock: GTW) recently, chief financial officer John Todd said the company's seasonal boom generally starts on Nov. 15.
With the holiday PC season about five years old, PC makers said they've got their roles down pat. Retail vendors like Hewlett-Packard Co. (stock: HWP) or Compaq Computer Corp. (stock: CPQ) try to lure vendors with an attractive design or value-added bundles, while direct-sales OEMs appeal to the more distinguishing shopper.
The traditional advantage of Dell Computer Corp. (stock: DELL), for example, has been to offer a quality PC with a lower price and superior support, said Brian Zucker, Dell's technology evangelist for home and small business products in Round Rock, Texas.
"Once you figure out what you want to buy, come buy it from us," Zucker said.
This year, Zucker said Dell believes consumers will be interested in buying a second PC for the home, and the company's push will be to sell consumers on the benefits of networking the two together via a wireless hub. Still, the solution will be expensive -- a 3Com Corp. (stock: COMS) wireless "starter kit," which includes a wireless access port, three PC add-on cards, and associated software, costs $1,328.95 on Dell's website. That's more than the price of a Dimension 4100, an 800-MHz Pentium III machine, without a monitor.
Dell executives also hope that office workers will be impressed by the performance of their Dell PC and purchase a similar Dimension desktop or other model for the home as well. Early birds can take advantage of $150 discounts on Dell Dimensions, although the offer ends Oct. 27.
But it's generally been up to the retail PC vendors to spark interest in consumers wandering store aisles, analysts said. And in this space, "it's not always the latest and greatest technologies that are the driver for our business," said a spokesman for HP, Cupertino, Calif.
While the sub-$1,000 PC segment should fare well, analysts said consumers are willing "to pay more to get more."
"The real value in value PC is at the $799 range," Baker said. "But the $1,000 to $1,300 price point is gaining and doing well."
While the $1,000 PC has held stable at about a third of U.S. retail PC sales since last June, the sub-$600 segment has shrunk dramatically, down from 42 percent to 22 percent. The numbers are helping to shape PC retail messages, which emphasize value and features, rather than the mentality of pure speed of direct vendors.
HP's sales efforts this season will be based on three messages, according to Eric Bone, the worldwide product manager for HP's home PC line. The company will continue to push HP machines as the best way to access the Internet.
"It's still the No. 1 driver for people buying PCs today," Bone said.
And while HP will attempt to lure buyers with the now de rigeur flexible color schemes, the company is also pushing digital imaging, whether it be still images or editable video.
PC vendors freely admit that they're attempting to cannibalize some of the selling points of the iMac from Apple Computer Inc. (stock: AAPL), beginning with the color schemes. Apple was also first to popularize the AirPort wireless networking hub and iMovie movie-editing studio. But, Apple, which trailblazed this market, is seeing some trouble. The company warned of slowing sales in late September, going into the critical buying season. It is not clear whether the pace has picked up in recent weeks.
HP, meanwhile, already sells Pinnacle Studio DV software inside existing Pavilion desktops. The company's goal is to tie the entire package together through to the core Windows Me OS, which supports basic digital imaging features, Bone said.
HP's MusicMatch software is also designed for consumer PC audio, and the company provides software for online digital photo sharing. The company has also consistently promoted and included CD-RW drives to allow users to burn their own CDs.
Appearance is also important, Bone said.
"I think we realized about a year ago that the design of the box is important for consumers," he said. "If prices are the same, as are the speeds and feeds, a consumer is going to pick a better looking box."
Gateway, San Diego, is in the unique position of owning its own Gateway Country storefronts, a more traditional retail presence inside kiosks at OfficeMax stores, and its own direct-sales business. Like HP, Dell, and other vendors, Gateway will also be trying to orient itself around the digital music revolution, promoting its already-established line of Photoware and Musicware bundles.
Obviously, the company will use its line of Gateway Country stores to encourage consumers to try before they buy. A series of PC gaming tournaments held in the Gateway stores, for example, will help to demonstrate the company's capabilities and convince consumers to buy a PC for gaming, not a console like the Sony Playstation 2.
"Our plan and our strategy is not only provide the technology and hardware, but to help you understand the advantages behind the technology," said Mike Ritter, director of consumer product marketing at Gateway.
Vendors said there is no guarantee that a particular PC will be successful in the marketplace, so they will try to mix and match various combinations of storage, memory, microprocessors and peripherals to satisfy the largest customer base. At a minimum, machines will probably have 128 Mbytes of RAM, if only to satisfy the needs of the new Microsoft Windows ME OS.
"I still think they buy for performance, basically, or to get more out of their PC," said Roger Kay, a PC analyst at IDC, who added that he believes the majority of purchasers will still be first-time buyers. "They'll be interested in multimedia performance, but also performance just for performing background applications, without degrading the performance of the application in the foreground."
PC Data's Baker said he looks for a relatively even split between AMD- and Intel-based PCs, with AMD's low-end share picking up as well. Advanced Micro Devices Inc. (stock: AMD) has had a relative vacuum in the low-end PC because the company's aging K6-2 really isn't seen as a competitor to the Celeron from Intel Corp. (stock: INTC).
Likewise, analysts and vendors alike don't see much impact from the Pentium 4, which sources have said has been officially delayed until Nov. 20. Vendors said they saw the chip as a high-end product only, likely to appeal to only an elite sliver of the population.
"It's not going to impact us," Dell's Zucker said. "It's just another product to offer the consumer."
"I think with the Pentium 4, we're considering that a niche product," Gateway's Ritter said.
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