PC makers offer rebates to jumpstart sales

Hoping to reverse a year-long slump in computer sales, manufacturers, retailers and chipmakers are coming together to offer deep discounts on consumer PCs.

Not only has the use of mail-in rebates increased, but manufacturers are throwing in free--or nearly free--printers, extra memory and handheld computers. And with Intel cutting processor prices next week by about 50 percent, there will be even more bargains awaiting patient buyers.

The "misery that's happening for the (manufacturers) is going to translate into joy for the consumer," said Roger Kay, an IDC analyst. "Promotions still bring in traffic...When price promotions occur, traffic increases for some period of time. It's a proven technique."

The back-to-school season has historically been the second-busiest time of the year for PC sales. Still, the current emphasis on discounts, especially at the high end of the market, is particularly intense. In the past, many deeply discounted PCs came with a simple CD-ROM drive and small amounts of memory. Now it's hard to find a PC without a CD-rewritable drive, a DVD drive and less than 128MB of memory.

Circuit City, for example, advertised this week a $1 Compaq IJ650 printer for customers who purchase a Compaq Presario 5000Z desktop with a 1.2GHz Athlon processor from Advanced Micro Devices. Circuit City is also advertising a $200 mail-in rebate on the same machine when purchased with a 17-inch monitor, bringing its final price down to $1,300 with the printer.

A Compaq Presario 5104US with a 1GHz Pentium III chip, 15-inch monitor and printer can be found for $949 from CompUSA, after $330 worth of rebates.

"I've never seen so much activity in promoting sales," said Toni Duboise, an ARS analyst. "The promotional activity we are seeing is sponsored by the chip manufacturers themselves (and) the PC manufacturers...The quieter players are the retailers themselves."

Sub-$1,000 PCs
Sub-$1,000 PCs are plentiful from Hewlett-Packard, Compaq, Dell Computer, Gateway and other manufacturers.

The $799 price has been hot recently, said Sam Szteinbaum, HP's general manager for consumer PCs in North America.

At that price, a buyer can find an HP Pavilion 7920 PC with a 900MHz Intel Celeron processor, 128MB of SDRAM, a 30GB hard drive, a CD-RW drive, a 15-inch monitor and an HP DeskJet DJ648 printer, after mail-in rebates from both HP and CompUSA.

"What we find is that customers are very shrewd as to finding the right value. They know what they want, and they're willing to pay more for it if it makes sense," Szteinbaum said. "There's no question that achieving a certain price...brings customers in. That's why retailers do it."

Although specific offers such as a free printer usually last only one week, analysts say retailers and PC makers will continue to offer aggressive rebates in coming weeks.

"Manufacturers need to...attract replacement buyers, so what they're doing is offering incentives," Duboise said. "The PC price war is no secret. Whoever's got the best deal is going to get (customers') attention."

Rebate fever took off in the late 1990s when Internet service providers began to offer $400 rebates when consumers committed to paying for three years of Internet service. Many of the current manufacturer and retailer rebates are lower than the ISP rebates, but they come with no strings attached.

Weekly specials
Staples, CompUSA and BestBuy, for instance, all advertised deals on the HP Pavilion 7920 this week. Staples lists the machine for $1,099 and then pares the price to $899 with a $200 mail-in manufacturer's rebate. Best Buy lists the PC for $1,099 and then matches the $899 price tag, with a $150 manufacturer's rebate, a $30 mail-in rebate on the printer and an unnamed $20 mail-in rebate.

But CompUSA beats the pair by $100 by substituting the printer to lower the list price to $1,049. It then adds its own $100 mail-in rebate to HP's $150 mail-in rebate. The price works out to $799.

If there's a downside to rebates it is that most of the time they are available only for systems, which include at the least a PC and a monitor. Buyers who have perfectly good monitors might end up paying full price to get the standalone PC.

For example, HP's rebate strategy "is really more aimed at trying to get people to buy more components" than just the PC itself, Szteinbaum said.

PC makers that sell at retail aren't the only ones to offer deals. Direct seller Dell has been giving freebies to customers, such as free shipping and upgrades, since late last year.

"I've never seen (Dell) so aggressive as far as promotions," Duboise said. In addition to advertising its aggressive prices in newspapers, the company is bundling free printers or handhelds with desktop systems.

Other forms of rebates
Another form of rebating is to match prices. Direct seller Gateway, for example, offers several desktops in the sub-$1,000 range. But it recently pledged to beat competitors' prices, essentially granting customers who ask an on-the-spot rebate.

Notebooks are also seeing their share of rebates--though not as steep as desktop models. Almost every notebook from HP and Sony listed in CompUSA, Circuit City and Best Buy's Sunday ad fliers comes with a $100 mail-in rebate.

Chipmakers, especially Intel, have also gotten in on the action, likely sponsoring some of the rebates offered by retailers such as CompUSA, analysts say.

Sponsoring retailers' rebates gives Intel an effective inventory reduction tool, Kay said.

"There are a lot of marketing dollars out there specifically from Intel right now," Kay said. "Essentially, they need to clear the Pentium III out of the channel, so you'll see a lot of good deals on that" chip.

Intel confirmed that it is involved in a wide array of retail programs. But "we don't comment on the details of rebate and channel programs," an Intel representative said.

Transition means price cuts
Intel is planning a rapid transition away from the Pentium III on the desktop. This is set to begin next week, when the chipmaker implements Pentium 4 price cuts of around 50 percent. As a result of the move, most Pentium III systems that cost at least $800 will be replaced by Pentium 4-based PCs.

The chipmaker also will launch its 2GHz Pentium 4 next week.

The price cuts will position the Pentium 4 to work with Intel's forthcoming 845 chipset to create 1.5GHz Pentium 4 systems that can sell for $899, according to sources familiar with Intel's plans. The 845 chipset is designed to allow PC makers to build low-cost Pentium 4 PCs by using, among other components, lower-cost SDRAM memory instead of Rambus memory.

Most PC sellers shipping Pentium III PCs will transition completely to the Pentium 4 by the end of the year, Kay predicted.

However, there's one catch to toying with the market to try to eliminate inventory or spur demand: It costs a lot of money.

"It's costing them more than it ever has before, based on the values they have been offering," Duboise said. "There's no question that it's eating into the profitability of the PC manufacturers themselves."

To a PC maker, however, giving up revenue is always better than getting stuck with inventory, whose value depreciates quickly.

"The worse evil is to get stuck with the goods," Kay said. "Inventory is like fish. The longer you hold onto it, the more it rots."

Rebates to continue
Rebates will likely stay around as long as the market is sour, which means they might continue for some time.

The situation isn't looking up yet. So far, August is off to a slow start, according to market researcher NPD Intelect. And PC sales from mid-August through the first week in September generally make or break the quarter for retailers.

"I anticipate July is going to be down 20 to 25 percent, which is where we've been in other months," NPD analyst Stephen Baker said.

So far in August, he said, "volumes are low, but business is building properly. Seasonality is starting to kick in. Sales are up about 10 percent per week."

However, he added, "I think everyone has pretty much written off back to school and is focusing on (Windows) XP and Christmas for a real opportunity to try to get back" to normal.

Baker predicts "high single-digit year-over-year growth" for the holiday shopping season.

Meanwhile, IDC, which is in the process of revising its sales forecast, asserts that the PC market might not recover fully until 2003.