Computer price warfare

Associated Press

SAN JOSE, Calif. – Big rebates. Free printers. Promotions everywhere.

Consumers are now benefiting from a brutal price war as personal computer makers try to stimulate demand – and stay alive.

The economic slowdown has tightened the screws on a saturated market, leading in 2001’s first quarter to the industry’s first-ever U.S. revenue decline.

Aggressive pricing by market leader Dell Computer Corp. has forced smaller PC makers to bow out or scale back.

“This has been Dell’s strategy from the beginning. It’s just working better now,” said Roger Kay, analyst with International Data Corp. “Inevitably, some will get strangled and leave.”

Micron Electronics Inc. had $1 billion in PC sales in fiscal 2000. But the price war proved too tough: It recently sold its PC business to Gores Technology Group, a private investment group.

From October to March, overall prices of mainstream computers sold by major U.S. vendors dropped by 22 percent, according to computer researcher IDEAS International.

Prices by Dell, whose 24 percent share of U.S. sales is almost double that of second-place Compaq Computer Corp., were sliced by more than 30 percent. Dell’s products were still 23 percent cheaper than the industry average.

Round Rock, Texas-based Dell, which has steadily gained market share with its direct-order business model, shows no signs of relenting.

The 1.7-gigahertz Pentium 4 processor debuted in computers just a few weeks ago. Dell has already dropped its introductory price by 20 percent – to $1,349 – for Dimension desktops featuring the fastest available PC chip.

Today’s aggressive promotions and price cuts – $400 dollar instant rebates, free shipping, free printers and free Internet access abound – come after steady long-term price drops, in part due to cheaper components.

The average retail price for desktop PCs was $880 in February, compared with $1,700 in 1996, according to NPD Intelect.

The brains of PCs – processors – are at bargain-basement prices. Chipmakers Intel Corp. and Advanced Micro Devices Inc., engaged in their own battle, have repeatedly slashed prices.

Intel’s new 1.7 gigahertz Pentium 4 chip started at a bulk price of $352 when it debuted last month. By comparison, when Intel introduced its 1.1-GHz Pentium III in July, it sold for a hefty $990.

“What you’re getting for your money now is mind-boggling,” said Mark N. Vena, of Compaq’s Home and Office Division.

Compaq’s high-end home computer with a 1.1 gigahertz processor, movie-editing software, DVD recorder and five free Electronics Arts games, now sells for $2,000. That’s $500 less than what it cost in January, said Vena.

Slashing prices wins customers, but it also translates to lower profit margins. PC makers are reeling from declining revenue: Compaq, HP, Gateway Inc. and Dell all have announced layoffs this year.

Without middlemen or channel distributors, analysts say Dell has the upper hand. It is able to save on supply chain expenses and efficiently pass on cost savings to its customers.

“Dell has an hour of oxygen and others have a half-hour,” said Andy Neff, an analyst at Bear Stearns. “And Dell’s agenda is to convince everyone they shouldn’t even go in the water.”

In the meantime, consumers can expect more good deals.

“Everyone has accepted that automobiles get more expensive when they gain more features, but the computer industry has set the opposite expectation,” Kay said. “They say, ‘Next year, it’ll be faster, better, and cheaper.’ It’s the devil’s bargain.”