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How low can PC prices go?
With PC prices falling, manufacturers are pushing extras to make up for lost revenue.
August 30, 2005: 3:18 PM EDT
by Amanda Cantrell, CNN/Money staff writer
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NEW YORK (CNN/Money) - If you're willing to forgo extras, you can snap up a brand-new PC for as little as 300 bucks.

But as rock-bottom prices continue to take a chunk out of revenues, PC manufacturers are starting to push those extra features aggressively.

As the major computer makers gear up for the back-to-school sales season, one of the hottest topics in the industry has been whether the average selling price for personal computers will continue to drop as technology improves and competition among the major manufacturers heats up.

In recent years, Dell has rolled out bare-bones PCs as low as $299 to entice consumers, and even Apple -- which has traditionally sold more expensive machines than its competitors -- has gotten in on the act with a sub-$500 PC.

But such strategies came back to bite Dell in the company's fiscal second quarter, when Dell missed revenue estimates by $300 million because it sold too many low-cost units.

The company, via its direct sales model, generally tries to sell its customers a more expensive setup than they had originally planned to buy. But in the second quarter, it didn't do this nearly as well as it usually did.

The snafu led a Citigroup analyst to call Dell's pricing strategy in the face of possible further revenue shortfalls "a significant wild card for the entire PC industry in coming quarters," and analysts and investors are speculating on how much further prices can fall -- and what the major PC manufacturers will have to do to make up the revenue.

Watch out, falling prices

Bill Fearnley Jr., technology analyst at FTN Midwest Securities, said he firmly believes prices are continuing to decline, in part because the prices of computer components are declining but also because computer makers are using price as a weapon to gain market share. This is most pronounced in the consumer segment, he said.

Fearnley said the declining average sale price for a PC means manufacturers will have to start expanding their focus beyond their bread and butter.

"First, you have to sell more units than you did a year ago; second, you need to sell more features; and three, you need to put more products into the customer's shopping cart," he said. "You need to sell them more memory, a larger hard drive, a better DVD drive...also, you are seeing them sell more accessories and software peripherals."

The major players -- Dell and Hewlett-Packard -- are also expanding into higher-margin businesses so they are not as dependent on PC sales.

"You see them getting more and more into services," he said. "Both are pushing their printer businesses more. Dell is a classic example of this. They weren't a major factor in printers and storage a few years ago but now they are."

Consumers get more discriminating

What happened with Dell in the second quarter is not necessarily pandemic to the PC industry, however. In fact, some analysts say the ultra-low cost PC market may actually be drying up as consumers begin to focus more on performance than price.

Mark Stahlman, technology strategist at Caris & Company, said he believes the market for ultra-low cost PCs has shrunk significantly, in part because with improved technology and better computing capability, PC makers are having an easier time selling higher-priced products to consumers.

"This is not 2001 or 2002, when it was cheap, cheap, cheap," he said. "We are in a situation where people are looking for more and in some cases willing to pay for it."

Stahlman also pointed to the success of Apple, which he called "the ultimate upsell PC vendor," as another example of how consumers aren't necessarily buying the cheapest machines on the market.

Mona Eraiba, an analyst with Rosetta Group Research, said she thinks prices are actually still trending down, but at a much more reasonable pace.

"The biggest event right now is back-to-school, so there is a lot of push to capture this volume," she said. "The bigger players like HP and Dell are moving aggressively to offer various packages that are attractive to consumers...but I don't see massively aggressive pricing."

Eraiba said the growth of notebook computers, the fastest-growing segment of the PC market, will make it difficult for Dell to get consumers to add on additional products, such as monitors, because there are fewer things to add to a notebook than there are to desktop computers. This could put a kink in its strategy to sell consumers more expensive packages, she said.

"The notebook market is where the growth is coming from, and Dell is finding difficulty in the U.S., where HP is very aggressive in consumer channels," Eraiba said. "I think HP figured out what packages consumers want and focused on that, without giving too many options for people to get confused or just buy the lowest-cost set up and move on."

Fearnley said he believes Dell and HP will be best prepared to withstand falling prices, while Gateway will probably struggle the most because almost 80 percent of its revenues are from PCs -- for instance, it does not have a printer brand like Dell and HP.

"I think Dell realizes what their issue is and I think they'll fix it, and HP's PC business is improving," he said. "The one that's been hurt the most is Gateway because they're trying to establish their brand during an intense price competition. That's a tough position to be in."

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Apple fights record companies over music download prices: Click here.

Verizon cuts WiFi fees: Click here.

FTN Midwest Securities does not have banking ties to HP, Dell or Gateway, nor does it own more than 1 percent of those companies' shares, but it is a market-maker for Dell. Caris & Company and Rosetta Group do not own shares of the companies mentioned in this story, nor do they have banking ties to the companies.  Top of page

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