PC makers squeezed by upscale sales

Consumers are moving toward higher-end PCs, but it isn't necessarily good news for PC makers, who are having to slash prices to the bone
Written by John G.Spooner, Contributor
The high-end PC is coming back in style. Despite continued economic gloom, anecdotal evidence indicates that PC buyers purchased more high-end desktop models in the final three months of 2001 than in recent quarters, pointing to a mini-renaissance in the PC lifestyle. Many consumers have been purchasing desktops with memory allotments of 256MB or more and hard drive sizes of 60GB to 80GB or even more. The buyers often paired those features with flat-panel displays--which doubled in sales in 2001--wireless networking equipment, and DVD recordable drives. At retail, sales of notebooks, more expensive than desktops, are also on the rise. "Defying all expectation and gravity, our average price for consumer desktops went up in the fourth quarter" by about 6 percent, said Mike Winkler, executive vice president of Compaq Computer's global business units. "The people buying today are buying up. Part of it is a more sophisticated buyer, but part of it is also people who are getting into applications such as (digital) photos and video editing." The shift toward luxury, though, may not signal a sea change in consumer behavior. In what could be described as a case of unintentional upgrading, consumers are buying deluxe models simply because it's tough not to purchase a performance machine due to falling prices for components. Seasonal rebates and product bundles that let consumers get printers and large monitors for little or no cost have also been instrumental in luring buyers. "Consumers aren't going toward fancier PCs so much as fancier PCs are going toward buyers...It is hard to find a PC for over 1,500 bucks," said Dean McCarron, principal analyst at Mercury Research. "The value you are getting for your money is insane. The PC market is its own worst enemy." Meta Group says the value that buyers get by shopping at the high end justifies the extra $150 to $300 (£105 to £210) in price for a high-powered system from a top-tier manufacturer. Sony's experience in the market in some ways is emblematic of these trends. The Japanese electronics giant re-entered the US desktop market two-and-a-half years ago after a fizzled entry in the mid-1990s. Rather than focus on price, Sony has chosen to concentrate on industrial design and on integrating software into its PCs for managing music libraries or recording TV programs in a TiVo-like fashion. Despite its higher average-selling price than most other manufacturers, Sony is gaining market share at retail, according to NPD Intelect. Through the first 11 months of 2001, the company had 6.7 percent of the retail PC market, NPD said, putting it in fourth place behind Hewlett-Packard, Compaq and Emachines. Sony began coming on strong in June and peaked in October with 14.2 percent of the market that month, earning it the No. 3 spot. "It is more than the PC. It is the applications" that attract customers, said Mark Viken, senior vice president in the IT products division at Sony Electronics. Nonetheless, he added, "you certainly have to be competitive on the feeds and speeds. We certainly can charge a premium for some of these applications, but we have to be in a particular range." Then again, Sony has quietly canceled one of its more glamorous PCs, the Vaio Slimtop Pen Tablet, because of slow sales. Convergence at last
Sony's effort to turn the PC into a central hub of digital entertainment is as old as the home computer itself. Many other efforts have failed, such as the PC-TVs once offered by Gateway and Compaq. Nonetheless, convergence began to take on an air of inevitability in 1999 and 2000. The rise of song-swapping service Napster and the unexpected popularity of CD-rewritable drives have forged a link between the home computer and the stereo. Mass acceptance of digital photos and, more recently, of digital video has further expanded the PC's reach in the home. By the end of 2000, Intel, Microsoft, Apple Computer, and every other major PC company had launched strategies to cement the bond between entertainment and computing. "High-end PCs are...coming back in style," said Mike Ritter, vice president of product marketing at Gateway. "The reason for it is (consumers') applications needs. To do video efficiently, the more horsepower you have...the better it works" on a PC. "There's a lot of movement on the high end," added Erin Nelson, director of marketing for Dell Computer's consumer group. "You get people who are, a lot of times, surprised by what they can get for their dollar." Dell has seen this movement--a company buzzword for good sales--in increased requests for flat-panel monitors, additional memory, and features such as DVD recording drives. It helps that these components have been declining in price. A 15-inch flat panel that once cost $900 to $1,000 can now go for under $300. Prices for flat panels may rise this year because of growing demand, but they likely won't exceed $500, industry watchers say. A glance at some of the configuration engines at online dealers shows how cheap computers have become. At PCUSA, a "white box" dealer, upgrading from a 1.4GHz Intel Pentium 4 to a 1.5GHz Pentium 4 adds a whopping $13.75 to the price of a computer. Jumping from a 20GB hard drive to a 40GB drive adds $11.50 to the price. At Dell.com, moving from a 1.4GHz Pentium 4 to a 1.6GHz Pentium 4 costs $30, and doubling the hard drive to 40GB adds $20. What $1,500 buys
"The prices of high-end features are coming down very rapidly," said Brooks Gray, an analyst with Technology Business Research. "The $1,500 price range is attractive enough that customers are willing to pay that for a computer. They're used to paying more." So what can one get for $1,500? Compaq's highest-end consumer desktop, for example, the Presario 8000, starts at $1,536 with AMD's flagship Athlon XP 2000+ chip, 256MB of RAM, a 60GB hard drive, a 17-inch monitor, and DVD and CD-RW drives. Boosting the hard drive to 80GB adds $25. For $1,311, Dell sells a Dimension 4300 with a 1.4GHz Pentium 4, 256MB of RAM, a 40GB hard drive, a 15-inch flat panel, a CD-RW/DVD combo drive, a Lexmark printer, and six months of Internet service. Exceptional cheapskates can substitute in a refurbished 17-inch monitor to drop the price to $1,048. Apple's new flat-panel iMac also competes well with its Windows brethren. The $1,499 midrange version of the machine, announced last week, offers a 700MHz G4 processor, 256MB of memory, a 40GB hard drive, a CD-RW/DVD combo drive, and a built-in 15-inch flat- panel monitor. Another $300 gets consumers an 800MHz G4, a 60GB drive, and a DVD recording drive. "We give you everything you need to get the most out of all your digital devices," said Phil Schiller, Apple's vice president of worldwide marketing. And Apple's "digital hub" strategy, launched last year, seeks to optimise its Mac OS X operating system for use with software such as iTunes 2, iPhoto, iMovie and iDVD 2 for digital music players, cameras and camcorders and for authoring DVDs. All the computer makers are trying to differentiate their total package to, ideally, elevate their PCs from a commodity status. Sony, for instance, includes software such as its Giga Pocket, which lets a PC record live TV like a TiVo digital video recorder does. The company has also set up online services such as Screenblast, which makes it easy to add special effects or scenes from Sony films to home movies. "A lot of the software and product strategy are developed for the world market and then localised," Viken said, adding that Japanese consumers "tend to be a little more upscale" than others. The company will also soon begin to promote 802.11a, a fast wireless-networking standard that will let consumers swap movies from the PC to the television sans cables, he said. HP, meanwhile, envisions a future in which consumers will increasingly depend on online services for needs such as photo finishing. Such services will largely come from the PC manufacturer, said Rich DeMillo, HP's chief technology officer. Ultimately, he said, "the PC becomes a peripheral for other items. It hosts applications." HP will also differentiate its PCs through "radical simplicity"--that is, coming up with software that will make HP computers far easier to use than those from competitors. Gateway also touts services, such as installing wireless networks in homes, as a way to differentiate itself. For its part, Compaq is exploring new hardware avenues. "I think the Tablet PC, as we go into the latter half of the year, is going to be a very important product," Winkler said. "I think it's going to surprise people. Like we did with the iPaq (handheld), I think we'll have a superior implementation that will take the market." Can it last?
Although the fourth quarter brought an unexpected lift for PC makers, the first quarter is typically a slower sales period, as consumers recover from the holidays and corporations gear up for the coming year. And the first quarter of 2002 will be watched more closely than in some years because of the overall sour economy. Consumer interest in high-end PCs, however, is holding up so far. "We're seeing it still, now with the new 2.2GHz" Pentium 4 machines, Gateway's Ritter said. Gateway's new 700XL PC, a top-of-the-line desktop with the 2.2GHz chip, 1GB of Rambus memory, a 120GB hard drive, and a DVD writer/recorder is selling well, he said, catching Gateway "a bit by surprise". Another area in which a clear pattern toward luxury can be seen is in a continued shift toward notebooks. "Consumer notebook demand got pummeled in (the fourth quarter of 2000). It started to pick up pretty dramatically" in the second quarter of last year, said Alan Promisel, an analyst with IDC. During the third quarter of 2001, notebooks accounted for 25 percent of PC shipments, up from 22 percent during the same period in 2000. Meanwhile, notebook sales at retail during the recent holiday-shopping season were up nearly 20 percent from the same period in the previous year, according to NPD. Although the convenience of wireless networking clearly draws customers to notebooks, price has also paved the way for the shift, Promisel said. The average selling price of a notebook fell from $2,075 in the third quarter of 2000 to $1,800 in the third quarter of 2001. And notebooks that once sold for $1,300 to $1,500 in 2000 now go for around $1,000. See the Hardware News Section for the latest update on everything from MP3 players and PDAs to supercomputing. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet news forum. Let the editors know what you think in the Mailroom. And read other letters.
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