Dell Could Trigger PC Price War

Dell's plan to cut prices has analysts warning of a potential PC price war.

Dell appears poised to spark another PC price war.

But analysts say that offering lower prices alone isnt likely to help the worlds largest PC maker end a run of lackluster financials. While Dells decision to use an AMD chip for multiprocessor enterprise systems dominated the headlines, the day after for the PC giant brought worries about a price war.

Following the release of the Austin, Texas, companys first-quarter earnings on May 18, Dell CEO Kevin Rollins said that Dell had resolved to cut prices—and some reductions have already been made—in a tri-fold effort that also involves increasing product quality and bolstering service and support. The company reported earnings of 33 cents a share on revenue of $14.2 billion, in line with lowered Wall Street estimates.

"Our history tells us—and were setting the examples—that it will accelerate growth. It does come at a margin bump. So were prepared to take that," Rollins said, speaking during a conference call with analysts on May 18. "We believe well see sustained growth that will allow us to move back into profitability long term."

Dell has consistently grown its unit shipments at a more rapid pace than the market at large. But it saw that trend reverse itself in the first quarter, when its shipment growth of around 10 percent fell below the markets figure of about 13 percent, as measured by Gartner Group and IDC. By combining more aggressive pricing with improvements in quality as well as service and support, Rollins said Dell will stimulate demand for its products and return the company to what executives deem a more normal pattern of growth over the long term.

"We think with a combined effort there … that well be in better strategic shape and over the long run our profitability will be better."

But Dells chief financial officer, Jim Schneider, stopped short of calling the effort a brewing price war.

"The way we look at it now, its not like trying to ignite some price war, but to see where we can get the best combination of price and profitability for the long term," Schneider said during the conference call. "Were trying to find the right spot where we can get growth of higher than six percent."

/zimages/6/28571.gifClick here to read about Dells growing relationship with the channel.

But, given that Hewlett-Packard and other PC makers have become more aggressive in recent times, lower PC prices in many respects no longer offer the same pull that they did in the past, analysts said.

"If [Dell executives] nuke the price, theyre also going to nuke their own margins and they cant afford to do that right now," said Roger Kay, president of Endpoint Technologies Associates in Wayland, Mass. "Itll have to be a combination of price and supply chain management."

Unless it wants to fight a price war all the way to the bottom, Kay said, Dell must also take a new approach

"Up until now, its been, Well give you everything that everyone else has at a much better price," he said. Now, "What Dell needs to do is market differently—it needs to take a page out of HPs marketing playbook and emphasize the benefits of the features [its PCs] offer rather than the fact that they have a great price. It needs to tell customers why they should care."

Next Page: Price war is likely to erupt.