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To: VICTORIA GATE, MD who wrote (51389)	3/27/1998 1:52:00 AM
From: Sonny McWilliams	Respond to of 186894

VG. Thanks for the article. Hm. And CPQ is coming out with computers in the 500 dollar range. I wonder if they will even hit 100 profit per unit and what will it do to the PC market. Sonny

To: VICTORIA GATE, MD who wrote (51389)	3/27/1998 2:36:00 AM
From: Barry Grossman	Respond to of 186894

All - From Briefing.com For Schwab customers: briefing.com PC Price War to Result in Casualties Daily commentary updated for March 27, 1998 Good news: demand for desktop PCs is strong. Bad news: lower prices driving demand. Typically in a demand driven market prices hold firm. Not the case in the PC industry where lower component costs, intense competition, currency fluctuations, excess inventories and a paradigm shift are keeping downward pressure on prices. Just the other day, Compaq CEO noted that the lowest priced PCs, now about $850, will be closer to $650 by next year. Low-end Prices Falling Fast On the low end, prices will continue to fall as consumers have come to realize that basic needs like personal finance, games, Internet access and word processing don't require the newest and fastest processors. Current configurations are plenty adequate. What isn't adequate is bandwidth capabilities. Consumer focus is on widening the pipeline, not increasing processor speed. We expect this paradigm shift in the tech industry to keep downward pressure on PC prices for years to come. Don't be surprised if in a few years, lowest priced PC will be in the $400-$300 range. Equally alarming - as cable modems increase in availability much of what consumers demand from PCs will be available over TV sets. New User Myth Many in the market are pacifying themselves with the view that low prices are a good thing in that they will translate into many new users. In time, these new owners will upgrade to higher priced PCs. Let's face it, you can only be a new buyer once. But truth be told, cheap PCs are not expanding the base of PC users to any great degree. Two trends are developing. One, low priced machines cannibalizing sales of higher priced computers. Two, households with one PC using lower prices as excuse to add second or third computer. Meanwhile, domestic penetration has risen by only a few percentage points. High-end Market What about the high-end consumer/corporate market? So far pricing pressures haven't been as great on the high end, but that is changing. Lower low-end prices resulting in across the board price compression. According to ARS research, average selling prices to businesses declined from $3088 in 1997 to just over $2722 in February. As basic PC prices continue to fall, so will the upper end prices. Businesses also beginning to realize that not every user requires the latest, greatest box. Expect more and more corporations to purchase sub-$1000 PCs, driving down ASP's even further. Laptops The outlook in the laptop market isn't much better - at least over the near-term. With Intel introducing portable Pentium II chips next week, PC makers are expected to unveil several new models. While the new, faster laptops should spur demand in this slumping segment of the PC industry, they will also trigger an aggressive price war for the older models. Companies such as IBM, with lots of inventory in the channel, will see margins squeezed badly. Silver Linings Microsoft's expected release of Windows 98 will bolster PC sales late in the year, as did the release of Windows 95 a few years back. Should help PC industry hit growth target for CY98 of 12%-15%. Server/workstation sales remain strong. PC demand in Europe picking up as European corporations play catch-up with the technological advances made by their US counterparts. There is tremendous long-term upside potential for new sales to the Asian and Latin American markets where consumer and corporate ownership rates are very low. Blind Faith While the above developments are bullish for the long-term, near-term we are amazed at the market's blind faith in PC stocks. Despite Compaq's warning and cautionary comments by Hewlett-Packard, street has bid many of these stocks sharply higher over recent months. IBM and Compaq even got into the act over the past week. Two of the best performers have been build-to-order specialists, Dell and Gateway, on the assumption that these companies are sheltered from the inventory concerns. But lower prices resulting from the inventory build up and from fierce competition for market share will impact all PC makers as prices come down aggressively. Though we agree that all PC companies shouldn't be treated equally (Dell's prospects far exceed those of IBM), we do see margins coming down across the board. This trend will result in negative earnings surprises. As such, Briefing expects the PC group to slightly underperform the market in the months to come. ------------------- Interesting. Buying opportunities coming up soon. Barry