<HP: Y2K spending will hurt growth >
I started raising this question back in July. It started to become clear that something had to happen, but the question was what. There still eem to be a lot of mixed opinions, but you can bet that there are some reports sitting on desks that have some pretty serious polls on how spending is being effected.
Last year, we saw a lot of earnings short falls blamed on y2k taking money out of the budget. At the time, it may have been a fudge against deeper problems, but surely we are approaching an event.
Regards,
Mark
Computers
Sub-$500 PC Due; Impact Unknown
From the Systems pages of Electronic News: October 12, 1998 Issue
By Peter Brown
San Jose--e-machines, a joint venture between TriGem and Korean Data Systems (KDS), is making an audacious venture to proliferate the sub-$500 PC by rolling out what it claims will be computers selling in the retail channel for $399 and $499 price points. What is more interesting, however, is what the potential success of such an undertaking could bring--specifically forcing large PC OEMs to drive the cost of their PCs down to similar levels.
Some industry observers see this as the acid test for the sub-$500 market. If e-machines succeeds and makes any kind of profit by selling $499 and under PCs, than most observers see sub-$500 PCs exploding into the market with anyone from Compaq Computer and Acer Labs, to Dell Computer and Hewlett-Packard racing to drop their prices to compete. If the sub-$500 price point fails, PC OEMs will avoid it like the plague, at least for the time being.
While overall, the PC market has experienced a slump, much of the growth toward the end of 1997 and much into this year in the PC market has come from the low-end of the food chain, the sub-$1,000 PC market or segment zero. While some have enjoyed a steady growth in terms of market share and volumes in segment zero, others have been hit hard by the poor margins or they lack the ability to roll out significant volumes of PCs at this price point. The same problems can be found in the sub-$500 market where the margins are even lower and the risks of losing one's shirt are even more. This, along with the potential demand for sub-$500 PCs creates quite a stir.
"If (e-machines) is successful, this could radically change the PC market," said Scott Hudson, senior analyst at In-Stat, a market research firm. "We have had PCs at this price point before but this is the first time we see it from a well-financed company that can ramp up volume. Other volume price points come from clone chop shops but this is the first time someone with real clout goes directly to the consumer."
e-machines' first PC is based on the Cyrix 266MHz processor and will be offered for $399 in the retail channel. Dubbed the E Tower 266, the PC features 32MB of SDRAM, the ATI Rage 4MG processor, 512K level 2 cache, 24X CD-ROM, V.90 modem and a 2.1-gigabit hard disk drive (HDD). A 14-inch monitor can be included for an additional $100.
One of the big questions that arises is how will e-machines make any money while those at the sub-$1,000 level are struggling to make money? According to Stephen A. Dukker, president and CEO of e-machines and former president and CEO of Opti, the company will take advantage of manufacturing, shipping and supporting the PCs all in-house rather than having to go through multiple channels to get on the shelf. Having both TriGem and KDS in the same country allows the company to avoid having to move the PCs to third parties to find monitors or certain logic components. Utilizing the $75 Cyrix processor, the low price on memory and the low-end ATI graphics processor also has to help with the low price. Mr. Dukker said based on the volumes expected from these PCs and the component price commitments it has received from participating semiconductor vendors, e-machines expects to be profitable in 1999. However, it does not expect to be profitable in 4Q98 when the computers initially make it to the retail channels.
In-Stat's Mr. Hudson thinks that this is also a proving ground for the Cyrix processor that has received mixed reviews in the PC market up until this point. If e-machines has a lot of returned computers, Cyrix could receive yet another black eye because of it, said Mr. Hudson.
The E Tower 266 is slated to be on the shelves by Nov. 9. The company plans to ship more than 200,000 PCs this quarter and the joint venture partners have allotted this space in their facilities for this volume. e-machines is currently in discussion with STB, Circuit City, The Good Guys, Fry's and Best Buy to have e-machines' PCs in their stores by Nov. 9.
The E Tower 300, the second PC from e-machines, will feature the Intel 300MHz Celeron processor, a 3.2GB HDD, ATI's 2MG Rage graphics engine, 32MB of SDRAM, and a 24x CD-ROM. The E Tower is priced at $499 with an option for a $100 monitor. This PC is planned to be available later in November after the E Tower 266 is rolled out. Coming out Dec. 1 is e-machine's third PC product, dubbed the E-Desk 266, a convergence box that runs through a user's television set. The convergence box features a Cyrix M2 266MHz processor, 32MB of SDRAM, 2.1GB HDD, 3x DVD-ROM, Cirrus Logic's Laguna3D chip, and 512K level 2 cache. The E-Desk 266 is priced at $499, e-machines said.
In 1Q99, e-machines plans to roll out its E-Media PC, which is being billed as the PC version of the IMAC from Macintosh. The E-Media would have an integrated display and an industrial design priced at $599. Also in 1Q, e-machines plans to refresh its existing sub-$500 PCs with new processors such as the Celeron 300A.
Even though prices have dropped on most PCs in the market, PC OEMs still seem stuck selling to 40 percent of all homes. e-machines is trying to reach another 20 percent of the populous, including first-time buyers, lower income families, computer upgrades, and anyone else that could not afford even a segment zero price PC. The company does not plan to participate in the desktop market above the $599 level and wants to use new parts and current production types for all PCs, so the computers have above-average performance compared to most cheap machines in the market today.
e-machines expects to see 200,000 units shipped this quarter and in 2-3 years forecasts it will be a tier one supplier shipping more than 1 million units. The company expects to generate more than $200 million in revenue in 1999, be at the $2 billion level in 2-3 years and $5 billion in 5 years. e-machines said it plans to go public sometime toward the end of next year.
Industry observers for the most part give e-machines a fighting chance based on the fact it will be leveraging TriGem and KDS' manufacturing muscle that is known for cranking out high volume products. TriGem currently is a $1.7 billion PC manufacturer and KDS claims to be the third largest monitor maker in the world. TriGem has a 51 percent equity stake in e-machines, while KDS has 49 percent. TriGem said it has a capacity for 200,000 PCs a month or approximately 2.5 million a year. KDS said it rolls out 300,000 monitors a month or 3.5 million units a year.
While the verdict on e-machines is still out and probably won't be known for at least another year or so, the company has set the test for the sub-$500 market. Now it all depends on whether the company succeeds or not to see what the other major brand name PC OEMs will do. And that success depends on whether consumers are willing to buy a PC that may be far from state-of-the-art in two years and has to upgrade. This, coupled with the need for e-machines to generate significant volumes in order to survive, will make this market very interesting to watch in the remaining three months of the year and the subsequent years to follow. |
