How Low Can PC Prices Go?

As consumers cut back and the popularity of low-cost netbooks grows, the computer industry could see a sharp drop in prices

By Olga Kharif

When Jim Wahl bought his first computer back in 1995, it cost $2,500. In December, when the Dallas acquisitions manager bought a Hewlett-Packard (HPQ) laptop for his daughter, he paid just $600. "[In the past], it was a lot bigger decision," Wahl says. "But now, the tires on my car cost more than my laptop."

Personal computer prices tend to fall over time, of course. But in the past few months, computer prices have plummeted much more sharply than the usual 5% yearly declines. In the fourth quarter of 2008 alone, the average personal computer's selling price dropped 14.3%, according to consultancy IDC. Only once in the past 15 years have PC prices declined at a faster rate—in the fourth quarter of 2001, as the Internet bubble burst, when they dipped 14.5%, according to IDC.

And the recent slide may be a precursor to sharper declines ahead. As consumers cut back amid the global economic downturn and the popularity of low-cost computers known as netbooks rises, the computer industry could see a big drop in prices. "We are not done yet," says Rob Enderle, president of consultant Enderle Group. "The drop is going to continue through the year." Matthew Wilkins, an analyst with researcher iSuppli, predicts that average laptop prices could fall a further 10% in 2009, while desktop prices drop 15%.

Netbooks Cost as Little as $250

The accelerating price declines could change the dynamics of the tech industry. For consumers and corporate customers, the trend is overwhelmingly favorable. They get more computing capability than ever before, often for less than $1,000 and, in the case of netbooks, for as little as $250.

But for tech companies, the squeeze is painful. Computer makers such as Dell (DELL) and Lenovo are struggling as customers hunt hard for bargains. Manufacturers of components like memory chips and monitors are feeling the pinch, too. Even Intel (INTC) and Microsoft (MSFT), the two most powerful companies in the personal computer business, are making strategic adjustments to address the new realities of the business. The recession is certainly a major factor in the PC price declines, and, as rough as the economy looks now, it will recover at some point. What may not change, however, is the growing importance of netbooks. Manufacturers like Asus and Acer have been rolling out the stripped-down devices, which typically run $300 to $600, over the past year. And as consumers have scooped the products up, Hewlett-Packard and other top manufacturers have weighed in with their own netbooks. Even Apple (AAPL) is reportedly considering coming out with one of the devices. The number of netbooks shipped this year is expected to double, to 20 million, according to IDC, reaching 15% of all portable PC shipments.