BUSINESSWEEK ONLINE : APRIL 5, 1999 ISSUE
NEWS ANALYSIS & COMMENTARY

How Low Can PC Makers Go?


Low-cost PCs may be great news for consumers--until they check out the stock pages. With signs that order rates are slipping and more users are switching to cheap machines, analysts have grown nervous about profits for top PC makers such as Compaq Computer (CPQ), Dell Computer (DELL), and Gateway (GTW). Those stocks have been slammed--and have helped pull the market back from the Dow 10,000 milestone. ''This may be a real double whammy,'' says PC Data analyst Stephen Baker, whose Mar. 22 report showed February growth in shipments through retailers was an anemic 0.8%. ''In this market, the only way to grow is to take share from someone else.''

That spells price war, and Wall Street smells profit troubles ahead. But it's too soon to draw long-term conclusions. First-quarter sales are usually slow, and this year, PC makers are moving to new models based on Intel's (INTC) new Pentium III chip. The Y2K problem is interrupting normal corporate buying patterns. So it's hard to tell just what is happening with PC demand. International Data Corp., for instance, still expects worldwide PC sales to grow 14.1% this year.

But the downward pattern in pricing can't be missed. Even as the big players try to match emachines in the sub-$600 market, other startups are jumping in. Seattle-based Microworkz Computer Corp. says it plans to sell 200,000 ''Webzter Jr.'' PCs a month at $299 each. Meanwhile, sales of $1,500-plus PCs have fallen to 5% of the home market.

What's a PC maker to do? Either join the fight or cede market share. IBM's PC (IBM) business lost nearly $1 billion pretax last year and was in the red in 1996 and 1997. It's a tough call. ''Just how bad do they want to ship units?'' wonders CIBC Oppenheimer analyst James D. Poyner Jr. So bad that it hurts.

By Peter Burrows in San Mateo, Calif.

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