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News > Technology
PC makers woo buyers
January 6, 2001: 7:00 a.m. ET

Price cuts, new features are part of effort to reinvigorate retail sales
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - If you've had your eye on that snazzy new personal computer on display at the local electronics store but found the price tag just a little too high, you may be in luck.

In the wake of their weakest holiday season in recent memory, PC vendors are getting ready to drastically cut prices and offer rebates on overstocked systems.

"If you're a consumer and you decided to wait out the Christmas season, you're going to get some great buys from a price standpoint very shortly," said Tim Bajarin, president of technology consulting firm Creative Strategies Research International.

Starting this weekend, most vendors are going to start offering price cuts and rebates that will reduce the cost of desktop PCs anywhere between 15 percent and 25 percent, Bajarin said.


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That's a much deeper post-holiday discount than is usually seen. Last year, for example, most of the discounts were less than 10 percent, he said.

The reason is simple: PC makers built too many systems in anticipation of the typically strong holiday selling season, which didn't turn out to be so strong after all.

In fact, retail and mail-order desktop PC sales in December posted their largest annual percentage decline in five years, while the average selling price of a desktop system fell to $846, the lowest monthly average price of the year, according to a report released Wednesday by research firm PC Data.

Stephen Baker, PC Data's vice president of technology products research and analysis, attributed those less-than-stellar figures primarily to the weakening economy and its impact on the maturing PC market.

"The PC is much more of a mature product than it's ever been before, so it's much subject to the vagaries of the overall economy," Baker said. "When the economy slows and people retrench, they don't buy durable goods, and the PC is a big durable now."

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  PC companies do not want to have more than six weeks of inventory ... we're hearing about inventory build-ups in some companies that are as much as 13 weeks.  
     
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  Tim Bajarin
Creative Strategies
 
Computer makers who sell through retail dealers typically build up some extra inventory ahead of the holiday season, which historically has been the industry's strongest of the year.

Already, Apple Computer (AAPL: Research, Estimates) has cut prices on some of its high-end Macintosh systems by as much as $1,100 in an effort to move out a glut of excess inventory after this year's uncharacteristically slow holiday season.

And Bajarin said he expects companies like Hewlett-Packard (HWP: Research, Estimates), Compaq (CPQ: Research, Estimates) and other leading PC vendors to be making similar moves to clear the way for the next wave of consumer systems in 2001.

"PC companies do not want to have more than six weeks of inventory, and most of them try to live within three- and four-week turns," Bajarin said. "We're hearing about inventory build-ups in some companies that are as much as 13 weeks."

Digital video, accessories on the rise

Both Bajarin and Baker agree that price cuts will be a small part of PC vendors' overall effort to convince reluctant consumers to buy new systems in 2001. More important will be the kinds of features they offer on new models.

"If you look at why people are not buying PCs, most of the things I've seen say it's not price, it's the usability," Baker said. "Consumers are asking themselves, 'Why do I need to upgrade?' So by reducing prices, I don't know that there is this huge unmet demand that's going to bring in a lot of new purchasers."

In 1999, Internet service providers offering large rebates to PC buyers who agreed to sign up with them created an incentive for consumers to buy new systems, which accounted in part for the dramatic sales decline in 2000, Baker said.


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Now, the next real compelling reason for consumers to upgrade their systems is not likely to emerge until the second half of the year when re-writeable DVD drives, called DVD-R, become widely available, he said.

"The next generation of convergence for PCs and consumer electronics, I think, is going to be movies and video," Baker said. "If there were a mass-market recordable DVD solution, that would be something that would be a compelling upgrade."

Compaq, the world's largest PC vendor already has signaled that it is moving in that direction. The company announced plans this week to incorporate a DVD-R drive into its Presario 7000 PC later this year.

"The DVD recordable technology is getting much more affordable," said Mark Vena, director of consumer desktop product marketing at Compaq.

"The advantage of that is I can make a movie on my home computer and then send it to my grandmother who doesn't have to have a computer. All she needs is a DVD player to play that movie. We clearly view this as a powerful impetus for expanding the market and motivating users. There's no question about it."

But Bajarin is expecting the PC vendors to go to even greater lengths to win back the consumer dollar.

"While DVD-R may be a component, I think what we're actually going to see is bundling of digital cameras, MP3 players and other things that make the packages more interesting and enticing," he said. "That's the prevailing logic right now in the marketing departments."

Indeed, sales of other electronic devices that are used in conjunction with PCs soared this holiday season, according to PC Data's most recent research. For example, November sales of MP3 players rose 400 percent; sales of Web cams, used for video conferencing, rose 68 percent; while digital camera sales rose 26 percent.

At the same time, sales of handheld computers such as the "Pilot" devices offered by Palm and Handspring's "Visor" line, more than doubled, according to Baker.

"We definitely see peripheral categories growing in sales," he said. "Those are the kind of products people are buying as a complement to their PCs."

Don't underestimate broadband, 'Whistler'

Compaq's Vena pointed out that the growing availability of broadband Internet connections -- both through digital subscriber line, DSL, and cable access -- also could provide consumers a reason to upgrade their PCs in 2001.

"Broadband is growing gangbusters and will continue to be another very powerful motivation," he said.

Currently, if home users want to switch from a dial-up Internet service to broadband, they usually need to install a piece of hardware inside the box, called an Ethernet network adapter, to make it broadband compatible.

Compaq already is selling a lot of its systems with broadband network adapters built into them. Moving ahead, Vena said a lot more of the company's consumer systems will be so equipped.

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  Typically, people don't want to go through the hassle of taking an existing PC and adding the devices to it to make it broadband compatible.  
     
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  Mark Vena
Compaq
 
"Typically, people don't want to go through the hassle of taking an existing PC and adding the devices to it to make it broadband compatible, so they're buying new PCs with broadband connections on them," he said. "Then they can get very easy access to broadband services."

Bajarin said the expected release in the third quarter of Microsoft's latest operating system, code named "Whistler," also could help boost consumer PC sales.

Microsoft executives have described Whistler as a general-purpose operating system aimed at businesses but also suitable for individual users. It has been designed with more emphasis on multimedia features such as Web publishing and streaming audio and video.

"We think the biggest boost will come with the release of Whistler in the third quarter, which potentially could drive significant sales if Microsoft is effective in pushing the streaming media component of that," Bajarin said. graphic

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