Slowing PC Sales Spur Diverse Strategies

Dell to pursue market share, price cuts; Compaq takes profits-over-sales route, shunning price war.

The PC industrys top two players are taking markedly different tacks in addressing slumping sales.

Dell Computer Corp., in announcing its earnings, last week said it will continue to aggressively slash prices, sacrificing profit margins in pursuit of greater market share. Compaq Computer Corp., the worlds top PC vendor, afterward said it would not compete in a price war, preferring profits over sales.

While a price war may have little impact on larger enterprises, Dells strategy could attract small to midsize businesses—which are more influenced by price—as well as consumers.

But for smaller PC makers struggling in the harsh economic climate, a price war could drive them out of business.

Some degree of consolidation will occur this year, said Kevin Knox, an analyst with Gartner Group Inc., in Stamford, Conn. While declining to speculate on which companies will drop out of the market, he said several vendors are obviously hurting, including eMachines Inc., NEC Corp. and Acer Inc. "Those companies, as well as other vendors, got hit extremely hard by the slowdown in the fourth quarter," Knox said. "I think those are the types of companies that need to rethink their PC strategies."

Financial figures released last week underscored the differences in Compaqs and Dells strategies. Compaq reported that its overall gross profit margin increased 1.5 percent, to 23.7 percent—boosted by strong sales of higher-end servers. Dell, the No. 1 direct-order PC maker, disclosed that its profit level fell 3 percent, to what one analyst said was about 18 percent.

Another major PC maker that has joined Dell, of Round Rock, Texas, in slashing prices is San Diego-based Gateway Inc. The second-largest direct-order PC company pledged to "take the lead" in cost cutting earlier this month after it reported losing $94 million in the fourth quarter.

But other leading PC makers, such as Houston-based Compaq; Hewlett-Packard Co., of Palo Alto, Calif.; and IBM, of Armonk, N.Y., are expected to lag in trimming prices. Those companies garner most of their revenues from non-PC sales, such as high-end servers, storage devices and services.

Falling prices alone wont lure larger customers, said one IT manager.

"Sometimes there is more to be gained by spending a few extra dollars upfront to maintain the standard," said Marshall Fernholz, procurement manager for the American Medical Association, in Chicago. "Once you start using different PC makers, the support costs rapidly transcend the hardware savings."