So how low can PC prices go?
Running faster to stand still
This article was first published in July 1999 PC vendors everywhere are running faster to keep standing still. Last week Compaq announced its intention to squeeze the prices of its mainly Taiwanese component suppliers by 15 per cent. The world’s biggest PC maker also aims to sell 25 per cent of its hardware online by the end of the year, making savings by retaining extra margin, while reducing inventory. Toshiba says it aims to improve annual stock turns from 25 to 50. If it reaches the target figure, it will merely be as efficient as Dell is now. Meanwhile Dell has signalled its intent to take down stock levels from six or seven days to six or seven hours. This is a direct assault on competitors and an indirect assault on the profit margins of mainly Taiwanese component suppliers. Today, there are two main areas of slack on PC prices – and they are Microsoft and Intel. Microsoft’s OEM prices for its operating system are looking increasingly out of whack, compared with RRPs. Its prices must fall, or else, the company risks losing share to the welter of small OS companies coming onto the market. Intel has the likes of Cyrix-Via, Rise and Transmeta snapping at its heels. It will let them fight it out and lose stacks of money in the ultra-cheapo market, while it guns for AMD, its only serious rival, in the performance sector. Intel may have profit margins in excess of 50 per cent, but it reckons that PC prices have some way to fall, especially in the UK. Last November, Intel CEO Craig Barrett famously denounced Dixons for singlehandedly keeping UK PC prices 15 per cent higher than the rest of Europe. However, what counts as robust discourse in one country is a matter for the libel lawyers in another. Barrett caved in a few weeks later, with an abject letter of apology to dear old Dixons. Dixons may have 50 per cent of PC sales to British consumers, and around 15 per cent of the market overall, but it cannot dictate prices. It does not control Microsoft and Intel profit margins and it has limited room for manouvre for its And if you ever thought the company’s PC prices were on the high side, take a look again. Dixons is knocking out PCs for under £400. Last year, equivalent specced rigs went for £800. And by Christmas, it will be knocking out stripped down PCs for £200. With price points like this, you’d think secondhand computer retailers might as well shut up shop. Only they will be selling proper PCs not the Internet connection devices masquerading as PCs that Dixons is thinking off. With PC prices at this level, Internet service providers will be able to give away kit, in return for monthly web access fees, and make a profit. This is the mobile phone pricing analogy, and one that I’m sure you’re all aware off. Maybe, Dixons could set up a Rentserve ISP. In its last financials (published 7 July), Dixons reveals that year on year PC sales grew 27 per cent in volume, but only three per cent in value. So what is it going to do about price deflation? In a curious case of running faster up the down escalator, the company is opening 100 new stores, and creating 3,000 new jobs(2,000 full-time). To maintain gross profits, Dixons has to grow sales and (by implication) market share in PCs, computer games, brown goods and mobile phones. This is a vote of confidence in the high street from one of the UK’s canniest retailers. It is also a declaration of war on other consumer electrical retailers. But more stores, and more people? Wasn’t Dixons tempted in anyway to accelerate its ecommerce retailing capabilities? After all, it is the owner of Freeserve, the UK’s biggest Internet Service Provider, and soon to be Europe’s biggest Internet stock. ®
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