PC Makers Duke It Out with Low Prices

IT managers get big discounts amid slowdown in growth

PC makers are wheeling and dealing to avoid being hit hard by a slowdown in unit shipment growth that will come in 2006 and following years, as the PC replacement cycle flattens. But lower pricing has already stung some.

Dell on July 21 announced that offering aggressive prices in the commercial market will cause its second-fiscal-quarter earnings to fall below expectations. It now expects to report $14 billion in revenue and earnings per share of 21 to 23 cents, below earlier expectations of $14.2 billion and 33 cents a share, respectively.

Given that most companies have purchased new computers in the last three years, 2005s growth rate of about 16 percent worldwide is expected to slow to less than 11 percent in 2006, according to market researchers Gartner and IDC.

PC manufacturers have been providing lower prices—some individuals report being offered PCs at discounts of as much as 40 percent off list prices—in an effort to maintain momentum.

"There are a lot of PC makers out there who are vying for a very finite number of buyers," said Leslie Fiering, an analyst with Gartner, in Stamford, Conn. "Youve got a lot of players that want to keep the factory lines going. So theyre duking it out."

The situation creates a dilemma for manufacturers, which, in cutting prices, must attempt to balance profits against market share. PC makers appear to be going for share at the moment, Fiering said, since large account bid prices continue to decline.

PC makers hope that, in time, the arrival of new PC technology along with Microsofts Windows Vista—a redesigned version of Windows due in November—will allow them to command higher prices, Fiering said.

But reversing momentum of falling prices has been difficult in the past. Data from IDCs Tracker service shows that average PC list prices in the United States fell by as much as 21 percent between the first quarter of 2003 and the first quarter of 2006. That means PC makers are offering discounts off already-reduced prices.

"Were seeing some smoking deals on everything—laptops and desktops. Its almost toaster pricing at this point," said one IT manager, who asked not to be named given the sensitivity of the negotiations.

The IT manager said that his most recent negotiations with Lenovo Group and IBM allowed him to gain much lower pricing than in 2005, indicating discounts in the 20 to 40 percent range.

Another IT manager re--ported receiving a bid price of about $2,000 for high-end notebooks he was planning to buy. The offer, he said, amounted to a discount of about 40 percent off list prices.

Aside from touting lower prices, manufacturers are also offering to bundle in extras, such as software and services.

In addition, PC makers are more willing to negotiate larger deals that include PCs, servers, storage products and services, the first IT manager said. "I think the marketplace as a whole is highly competitive," he said. "[Manufacturers are] making it very attractive across the board to purchase a lot [of products] from them."

PC makers are also looking at product quality and service and support, two elements that are critical in the minds of senior IT managers who buy PCs, as items that can allow them to stand out among the crowd of vendors.

Gateway plans to open a new customer contact call center in North Sioux City, S.D., to serve its business and consumer direct customers. Dell, for its part, has pledged to beef up its product quality.

PC reliability has already improved. Gartner has measured about a 25 percent decrease in annual PC hardware failures in the last two years. The figure, which signals an increase in reliability, derives from lower numbers of repairs.

"That aint altruism," Fiering said. "Investing a few pennies upfront in reliability and quality assurance results in dollars saved at the back end in warranty and support costs."

Ultimately, the slowing market, combined with increased focus on support and product quality, means that businesses PC-buying dollar goes further in 2006 than it did in previous years.

In just one example, an IBM ThinkPad T41 included a 14.1-inch display, a 1.6GHz Intel Pentium M processor, 512MB of RAM, a 40GB hard drive and a combination CD-RW/DVD-ROM drive for a list price of just over $2,050 in January 2004, according to a PC Magazine review. A similarly equipped version of the ThinkPad T43—the T41s direct successor, now sold by Lenovo Group—can be had for $1,199, Lenovos Web site showed. The T43, listed as model 1875DLU, offers a 1.73GHz Pentium M and a 60GB hard drive, but otherwise it is similarly configured.