February 29, 2000 10:00 AM PST

PC prices rise for fourth month

Prices of computers sold at retail stores rose for the fourth consecutive month in January while the growth in sales slowed, according to a new report, an indication that the dizzying pace of the consumer PC market may be slowing.

Still, consumers likely need not fret yet. The industry's hyperkinetic ability to manufacture components and computers continues unabated, so low PC prices will likely still be a main feature of the landscape.

The price surge, which was predicted last October and started to be confirmed in December, is a result of a combination of factors, according to PC Data analyst Stephen Baker.

Cooling customer interest in sub-$600 PCs, for instance, has driven average prices up. Another key aspect is growing consolidation among PC makers. With IBM gone, only Compaq, Hewlett-Packard and Emachines, for the most part, define the retail market.

"It's those pesky economic laws getting in the way again," Baker said. "Less competition means prices going up."

The average Windows-based PC sold in January was priced at $873 or 3.4 percent more than in December, when the average PC was sold for $844, according to a new report from PC Data, which tracks computer products sold at retail and through mail order. The report does not track sales from direct manufacturers such as Dell Computer and Gateway.

Other unique circumstances also drove prices up, sources said, and here the landscape seems to indicate an end to inclines. Processors and memory, for instance, were in tight supply at the end of last year, driving PC manufacturing costs up. These components are now in greater supply, which could lead to lower, or at least level, prices.

Still, PC Data's numbers are compelling and even show a slowdown in growth commensurate with the increases. Last month, PC unit growth continued to slide, dropping 7.7 percent compared to the same month last year, according to the report.

"The number one thing we're definitely seeing is a decline at the low-end of the market," Baker said.

Consumers are also apparently growing indifferent to the ultra-cheap PCs that gained attention last year. Seventy-five percent of the PCs sold were in the $600 to $1,000 range, according to PC Data, while sub-$600 machines accounted for only 22.9 percent, down from 35 percent in December.

"What Compaq and HP are basically seeing is that they're not getting the bang for the buck in the low-end that they expected," Baker said. "It's too hard to make the economics work."

Top PC makers in January*
PC maker Market share % increase from last year
Compaq 34% 13%
HP 32% 57%
Emachines 12.9% 196%
Apple 10.9% 17%
*Retail sales only
Source: PC Data
Despite this, Emachines, which primarily markets sub-$600 computers, took 12.9 percent of the retail market--ranking third overall--with 196 percent unit growth over last year. Emachines is the only real player in the sub-$600 market at this point, while HP and Compaq are marketing more robust configurations priced on average around $899.

"Consumers have definitely not lost interest in low-end PCs--Compaq and HP have," said Emachines CEO Stephen Dukker in an email, arguing that PC Data's numbers don't reflect the general retail market because they do not poll every major retail store.

"With IBM and [Packard Bell] exiting the market, HP and Compaq have both determined that they do not need to play in this segment to achieve their growth objectives. As such, Compaq has pulled back from $499 and, in fact from $599 as well," Dukker speculated.

Among the main manufacturers, Compaq took the top slot in the retail market. After Compaq, with its 34 percent of the market, came Hewlett-Packard, with 32.1 percent, up almost 60 percent from last year. After third-ranked Emachines came Apple with 10.9 percent of the market, up 17 percent from last year.

Apple has held steady with 10 percent of the market since the release of the iMac, Baker said, noting that eventually the company will have to refresh the design and feature set of the computer, as customers have been slow to upgrade their systems.

"How long can you sell on the 'cool factor?'" he said, noting that unlike previous Mac buyers, iMac customers have the benefit of many more Mac-compatible peripherals. "If you buy an iMac, you're not quite as orphaned as you once were."

Despite rising prices, consumers may not have that much to fear, sources said. Shortages in memory, processors and other components are being eclipsed.

Late last year, for instance, Intel couldn't supply enough Pentium III processors or low-end Celeron chips to PC manufacturers. That, however, is changing.

"In Q1 we will catch up on everything," said Pat Gelsinger, vice president of Intel's desktop products group. Likewise, AMD sold out of K6-2 chips during the fourth quarter but recently stated that sales will be stronger than expected in the first quarter.

Interestingly, for the first time, computers running on rival AMD's processors were priced higher than the average Intel-based computer, with 62 percent of all sub-$1,000 PCs running on Intel processors.

Memory prices, which can have a huge impact on profit margins for the lowest-priced computers, have also dropped.

Last October, 64-megabit SDRAM chips, the most common memory chip found in PCs, sold for $13 in the "spot" market--where manufacturers unload surplus--and for $10 to $11 in the contract market, where customers contract to buy large volumes over extended periods of time, said Jim Handy, an analyst at Dataquest. Memory prices spiked because of the earthquake in Taiwan, which in turn caused PC prices to rise.

Now, those same memory chips are selling for $4 in the spot market and $7 to $8 in the contract market. "But it (the contract price) will not be there for long," Handy said. "The first month that DRAM was profitable since November 1997 was November 1999."

The price shift comes because of a surplus of memory chips, he said. Not only did Taiwan emerge from the earthquake's aftermath quickly, companies that were unable to manufacture Rambus memory decided to expand production of regular SDRAM.

Whether the price decline will result in a PC price decline remains an open question. Sometimes, manufacturers do start engaging in price wars. At other times, however, they merely load systems up with more memory. "If they (computer makers) believe they have a lot of latitude, they will just put more parts in the system," he said.

News.com's Michael Kanellos contributed to this report.

 

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