PC price 'rotation' grows

Electronic News, March 3, 1997 by Cynthia Bournellis

Mountain View, Calif.--Computer companies aren't alarmed over the rash of price cutting that has taken place in the PC market this quarter. Why? Prices aren't dropping, they are "rotating," vendors say.

"This is nothing like the unusualness in 1996 when PC prices did drop 5 percent due to the price reductions in DRAMs, motherboards and SRAMs," noted Norm Bogen, a PC analyst at the In-Stat market research firm. At that time, DRAM prices declined 75 percent, and motherboard and SRAM prices dropped 40 percent.

As far as so-called price cuts go, the consensus among many OEMs is that it's just business as usual. "People buy at certain price points, so when Intel cuts the price of a 133MHz processor, we can now sell a faster system at a price that was the price of a previous, slower processor," said Bhupinder Saluja, a product marketing manager for commercial desktop PCs at Hewlett-Packard.

To some extent, the price rotation is happening because OEMs are revving up to sell Pentium with MMX machines. And, surprisingly, price cuts have already occurred here. NEC dropped prices of its PowerMate 166MHz and 200MHz MMX machines by up to 8 and 14 percent, respectively. "We are seeing good demand for MMX, and we wanted to keep pricing in line (with the next round of cuts)," said Cliff Apsey, director of product marketing for commercial desktops at NEC. Intel is expected to cut pricing on Pentium with MMX in April.

Earlier last month, Intel detailed its Pentium and Pentium Pro price adjustments (EN, Feb. 3), which tend to occur four times a year. And, generally, OEMs follow suit. "We cut systems pricing once a quarter," said NEC's Mr. Aspey, "because component pricing moves (drops) once a quarter." He said the PC price cuts are not tied to any industry trends or market downturns, such as last year's disappointing Christmas season in the retail channel.

Price rotation is also occurring in the PowerPC camp. Motorola's Computer group, Umax Computer and Power Computing all announced price cuts last month on Mac-compatible systems. Many of the cuts were due to the recent introduction of systems, some of which were aggressively priced, from Apple Computer. The Mac-compatible cuts are aimed in part to drive the price/performance advantage over the "Wintel" platform, said Andy Chang, senior VP of worldwide sales at Umax.

Constant price reductions are also being driven by a need for OEMs to improve market share and maintain a lead position. And while rotating prices are being viewed as business as usual, this perpetual discounting is creating a new phenomenon in the industry: the PC that sells for $1,000, give or take a few hundred dollars. A number of computer companies of late are now aiming their bows at this sweet spot. Last month, Compaq Computer created a stir with the introduction of a $999, non-Intel-based consumer PC, sans monitor. The new Presario 2100 is based on the MediaGX entry-level processor from tiny Intel rival Cyrix (EN, Feb. 24).

HP made a counter attack against the MediaGX-based Presario when the company added a $1,000-plus entry-level model to its Vectra 500 line of PCs for small businesses. The $1,094 Vectra 520 is a 133MHz Pentium machine that includes 16 megabytes of RAM, 256 kilobytes of cache and a 1.2-gigabyte hard drive. Intel OEMs will leverage the recent 34-percent price drop of the 133MHz Pentium chip to compete with systems based on the new Cyrix processor, said Michael Griffith, a semiconductor analyst at In-Stat.

At the same time, HP dropped prices of up to 23 percent on current models in its Vectra VE commercial computers. For instance, street pricing for a 120MHz machine with a 1GB hard drive and 8MB of RAM is now $931. Other vendors in this price range include Packard Bell NEC. The company introduced its $799 C115 PC in January. And AST Research has been selling a $999 system since last May.

The $1,000 computer also creates another route for Intel competitors looking to find a niche (see story, page 4), as well as alternate sources for OEMs who have been bullied by Intel into staying in one camp. "While this category will let vendors expand their options, it is not leading edge technology, nor does it create a major market," said In-Stat DRAM analyst Jim McGregor. "I have little faith in the sub-$1,000 system, because the market these systems are targeting could be better served by a Web TV or a set-top box."

In any event, analysts are expecting a stampede of vendors in this area. Compaq, for instance, who claimed it is going after the second-time buyer with its sleek new Presario 2100, is under attack from some observers who said an 8MB machine won't hold users' attention in the long run. "Maybe for a first-time buyer, 8MB is good enough. But if I were a second-time buyer, why would I buy an 8MB machine when memory is so cheap?" questioned In-Stat's Mr. Bogen, who speculated that the $1,000 PC market will only account for 10 percent of the PC pie this year.

Meanwhile, Mac-compatible vendors said they will watch this new market. And while companies such as Umax are undecided about whether or not they will sell a $1,000 machine that fits the Presario 2100 model, the company said it will deliver something competitive in the Mac OS space. For now, however, according to Bruce Berkoff, director of product marketing at Umax, the company is meeting its market's needs in terms of price and performance. "The people we sell to are current Mac users who are OK with their peripherals, and all they want to do is upgrade their computer."