Gateway, Dell PC Price War Heats Up

By eweek  |  Posted 2001-06-04

Gateway Inc. last week launched the latest assault in an increasingly bitter PC price war, a move that could further undermine industry profits. For an unspecified, limited time, San Diego-based Gateway Inc., the nations second-largest direct- order PC retailer, promised to beat any advertised price for computers sold by its top rivals.

The plan will cover commercial and consumer PCs advertised by Compaq Computer Corp., Dell Computer Corp., Hewlett-Packard Co., IBM, Sony Corp. and Toshiba Corp.

If PC makers respond with similar priced-based initiatives, it could further erode revenues, which have fallen significantly since late last year.

While consumers are generally most price-sensitive, corporate system managers say cost is only one factor they consider when buying systems.

"We buy systems based on project needs. To be honest, low prices wont convince me to buy a bunch of PCs," said Jeff Johnson, network manager for Triple S Plastics Inc., in Vicksburg, Mich.

Demand for PCs collapsed last fall and carried through the holiday season. Faced with warehouses full of unsold PCs, computer makers slashed prices. At the same time, Dell accelerated its cost cutting, fueled in part by falling component prices, particularly dropping dynamic RAM costs.

But to undercut rivals prices further, Dell cut into the profit it makes on each system. Profit margins for the Round Rock, Texas, company have fallen from 21 percent in the third quarter of last year to about 18 percent for the most recent quarter. In prior years, Dell profit margins have been in the mid-20 percent range.

At the same time, Dell has overcome Houston-based Compaq as the top PC vendor in the world.

Last month, Dell President James Vanderslice said the company will continue its aggressive pricing tactics. "This is going to be Bosnia," Vanderslice said.

After first refusing to respond to Dells pricing moves, Compaq in April said it would cut prices and sacrifice profit margins to protect market share.

While Dell is clearly gaining market share amid the PC industrys current downturn, its too early to declare it the winner of the price war, said analyst Andy Neff, of The Bear Stearns & Co. Inc., in New York.

"In 1943, was someone winning World War II? The answer was yes, but you couldnt tell at the time," Neff said. "It appears Dell is winning."

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