Internet behind the move to cheap PCs

As sales manager at the Consumers Computer Exchange in Houston, Paul Dulworth is intimately familiar with the latest and greatest technology. So now that he's looking for a PC, why is he looking at a sub-$1,000 system?

"I work with computers every day, but I'm thinking about getting one at home, and I'm considering buying one of these because they're such good deals," he said.

Dulworth is a member of a growing market phenomenon that has stunned many in the consumer industry.

Before now, you could always buy a cheap computer -- if you didn't mind giving up performance and buying from a no-name manufacturer. But that's all changed over the last year with major players such as Compaq Computer Corp. and IBM offering products that have major bang for the smaller buck.

Almost overnight, this market is one of the fastest-growing segments in the retail PC industry. According to Computer Intelligence of La Jolla, Calif., systems priced under $1,000 made up 27 percent of the retail market in September. And more than 60 percent of all systems purchased through retail stores cost less than $1,500.

Some analysts see that percentage going even higher. "We believe 40 percent of all PCs sold through retail this Christmas will be in the sub-$1,000 range," said Tim Bajarin of Creative Strategies Inc. in San Jose, Calif.

So who's buying these systems? Initially, analysts predicted the cheaper machines would do well with people buying a second home PC. But studies show the market is also pulling in people who have so far ignored the computer revolution. Bajarin estimates that 50 percent of all sub-$1,000 buyers this Christmas will be first-time computer buyers.

And not just buyers are benefiting. The sub-$1,000 PC "is good for us. It's bringing in new customers," said James Halpin, CEO of retailer CompUSA. Some 41 percent of the firm's low-end sales are to new buyers. And the average income of these buyers is substantially lower than the company's traditional market -- $50,000 per year, compared to $75,000.

In the past, it's always taken a "killer app" -- something new, different, and useful -- to bring in new buyers. This time, the killer app is the Internet. And surfing the Web doesn't really require huge amounts of processing power, which makes the lower-priced machines attractive to first-time buyers.

"If the customer is looking for basic things, getting on the Internet, or doing word processing, these systems work really well," said Mike Reddan, sales manager at Nobody Beats the Wiz in East Brunswick, N.J.

In fact, that's the same premise behind the NetPCs and network computers -- terminals that run server software over a network. While these systems have been aimed for the most part at business users, the consumer market has also taken interest in cheap machines (such as WebTV) designed to hook users up to the Internet.

Still, while a WebTV device can cost between $200 and $300, it doesn't have all the features of a full-fledged computer. Many users are finding that for $1,000 more, they can get a pretty loaded system.

"What we've been doing is keeping our basic price [$1,595, with a monitor ] and adding more and more features," said Darrell Gentry, president of the Computer Generation Inc. in Independence, Kan. "We've gone from a 100MHz system to a 200MHz system with bigger and bigger hard drives."

Some can sell those 200MHz systems even cheaper, machines that feature a processor from Advanced Micro Devices Inc. instead of a more expensive Intel Corp. chip.

But the world's largest chip maker has no intention of being left out of this revolution. Earlier this month, Intel announced that it was developing chips specifically for the low-end market. "It's obvious that this is the next golden ring, and everyone is going for it," Bajarin said.