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Surprise! PC prices climb

For the first time in years, prices of low-end PCs increase as competition drops and the economy rocks

For the first time in years, the cheapest home computers are getting more expensive.

Hewlett-Packard's lowest-priced Pavilion today costs $100 (£62) more than an equivalent did four months ago. Compaq Computer's lowest-priced Presario desktop now costs $200 more than its predecessor did last fall. All together, average personal-computer selling prices rose in November and December, according to market researcher PC Data After dipping below $800 from August through October, the average price for consumer computers reached a six-month high of $844 in December, the market research company said.

Driving the price hikes are a huge drop-off in competition, a healthy economy and the PC's growing role in home entertainment. The increases are particularly unusual for January, a month when computer makers routinely cut prices to generate new sales. What's more, newer business PCs are cheaper than their home counterparts, due to a more-competitive corporate market. Compaq's new iPaq business PC costs less than its consumer version.

IBM, Packard Bell NEC and Acer each pulled out of retail stores last year, leaving much more shelf space to Compaq and Hewlett Packard. The three who pulled out accounted for a total of 33.2 percent of retail sales in the fourth quarter of 1998, according to researcher NPD Intelect

Component shortages that hit the PC industry last year are not behind the current shift. While higher memory-chip prices were blamed for higher PC prices in November, chip costs have already returned to August's lower levels.

The ability to push prices up offers PC makers their first real break since Packard Bell NEC launched a bloody price war three years ago with a multimedia PC priced at $999. Prices for name-brand machines fell as low as $499 last year. But now, coming full circle, the newest home PC lines from Dell Computer and Compaq start at the old $999 price.

Can it last? Probably not. Hewlett-Packard marketing executive Robert Wait says falling prices may well return soon. "It's dangerous to bet a trend on just two quarters. What we know is there are two things stopping people from buying a PC today. The first is price. The second is it's too complex. Frankly, the company that manages to make lower-cost product that's simpler to use can still have a huge share in the consumer market."

Several companies are starting to roll out cheap stripped-down PCs designed for hooking up to the Internet. They should keep the lid on PC price increases as computer makers try to keep the new gadgets from winning over buyers. "This will be the first year that we have an important contribution from low-cost, Web-access devices," says Merrill Lynch & Co. analyst Steven M. Fortuna. "It'll behoove the PC vendors to keep entry prices low."

Still, consumers who were expecting a selection of below-$500 PCs from big-name brands should forget it. Mark Bates, senior analyst at PC Data, says the new pricing aims to put the bulk of home PC sales at between $700 and $900 this year.

The shift should result in higher profits in the $17bn US home-PC market -- at the risk of lower unit sales. Wait, of Hewlett-Packard, says it's a trade-off PC makers are willing to make. When they slashed prices, Wait says, companies thought they would be bringing new buyers into the market, and that they could make money by selling these users everything from printers to Internet service.

But it turned out that many purchasers of these discount machines were buying a second computer and had no need to shell out for the profit-making extras. "The $100 more that a high-style PC costs is a dramatic change in margin for the vendor and a very small step up in the retail price," Wait says.

For now, it appears demand is strong enough to support the price hikes. Barbara Canetti, a Houston college professor, just spent $2000 on a new high-powered PC. "I bought a Cadillac -- 19-inch monitor, DVD, and CD Writer," says Ms. Canetti. Having put off replacing her old clunker, "I figured I might as well get everything," she said.

Meanwhile, the company leading the way to lower prices last year has sharply pulled back. Since failing to complete an initial public offering of shares last summer, eMachines has shifted gears to higher-priced machines, such as the $799 eOne and the $899 eMonster.

While the company still sells two models priced below $500, the average price of a retail eMachines PC was $604 in December -- up from $455 in October -- says NDP Intelect Vice President Sima Vasa. What's more, the company sold 17.1 percent of its machines for prices between $750 and $1,000, up from no sales above $700 in July, she says. An eMachines spokeswoman declined to comment.

And the much-ballyhooed free PC of last summer no long exists. In November, Free-PC halted distribution after agreeing to be acquired by eMachines. Rival PeoplePC charges $24.95 a month for Internet service and a PC -- bundling the cost of the PC into a monthly service fee.

By paying more now, consumers aren't necessarily getting more-powerful computers for their money. But they are getting better-looking machines. Compaq's newest home PC is a funky, toasterlike design, while Dell's first entry into the low-end market is the hourglass-shaped WebPC. "We've seen strong customer reaction" to the WebPC, says Janet Mountain, vice president of Dell's US Consumer PC division. "Style is becoming more important."

The rousing success of Apple Computer's iMac also has convinced computer makers that they neglected design-conscious buyers in their rush to cut prices. "More and more, what consumers really care about is does their PC work well on the Internet, and does it look good?" says Hewlett-Packard's Wait.

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