Will PCs Remain a Bargain?

Even with rising energy costs, which are in turn pushing up shipping charges, PC manufacturers aren't likely to jump to raise prices. Instead, they may consider other ways to pass on costs.

Hurricanes have driven up energy prices in the United States, but they have yet to brush up against the PC industry.

Now that the fourth quarter is under way, PC manufacturers have much to look forward to. This quarter is typically the busiest of the year, thanks to holiday sales to consumers and corporate spend-it-or-lose-it budgets.

The largest brand-name companies, including Dell Inc., Hewlett-Packard Co. and Gateway Inc., have all launched new consumer PC lines of late.

The companies continue to offer aggressively priced models starting at roughly $250 to $350 for a desktop, after rebates, and about $500 to $600, after rebates, for notebooks, according to an informal survey by Ziff Davis Internet.

Beginning prices for SMB (small and midsize business)-oriented PCs, which are generally slightly higher, range from about $350 to $400 for a desktop and start around $700 for a notebook. The companies also target high-end consumers with machines like Dells multi-thousand dollar XPS models.

/zimages/6/28571.gifClick here to read more about price wars between HP and Dell.

Despite appearing to have little to no effect to date on the latest batch of consumer PCs or, for that matter, on prices of corporate machines, energy prices are starting to worry some in the industry.

Consumers and businesses are paying more for fuel—with the average price for a gallon of gasoline hovering around $3—and, with winter coming, face higher heating costs in many areas of the country as well. Those higher costs raise the prospect that at least some consumers and businesses will defer PC purchases.

At the same time, shipping costs—something PC makers must either eat or pass on to customers—have gone up across the board, due to higher fuel costs, an executive at Hewlett-Packard said.

"People arent likely to be deterred from buying something because theyre spending an extra couple hundred dollars on gas," said Steve Baker, an analyst with NPD Group Inc. However, "The wild card [for retailers and PC makers] is things like cost of distribution and turning on the lights."

Indeed, "We are starting to see some incremental costs in transportation, overall, in our cost structure," said Sam Stzeinbaum, general manager for HPs North America Consumer Computing Business.

The rising shipping costs, which include higher bills for air freight and increases in ground shipping rates, are not considered to be significant yet, Stzeinbaum said, although rising transportation costs can squeeze profit margins.

"All the costs of transportation are definitely going up," he said. "But as a percentage of the total cost of a product, its not a huge portion."

Similarly, Dell, of Round Rock, Texas, has yet to see a material impact from higher energy prices, a company spokesperson said.

/zimages/6/28571.gifSystems builders are preparing dual-core PCs. Click here to read more.

Still, rising shipping costs might eventually put a bigger squeeze on PC makers. As shipping costs go up or margins are squeezed in other ways—such as component prices—analysts say free shipping will be one of the first things to go, particularly for less expensive systems.

Aside from cutting margins, higher shipping costs can make it more difficult for PC makers to send people their orders for free, a powerful tool for motivating customers who buy direct.

Stzeinbaum said, "Its clear that free shipping is a very important attraction ... But it does have a real cost. You cant give it away all the time. When youre selling a $250 PC, if you ship it for free, its pretty painful."

Next Page: Consumer notebooks are still "flying off the shelves."