from the Wall Street Journal 

   August 21, 1998 [Tech Center]

Forget the $1,000 PC -- Prepare
For PCs Costing Less Than $400

   Associated Press
   
   Remember the $1,000 PC? Forget it -- here comes the $400 PC.
   
   Personal computers, which tumbled below the $1,000-price barrier just
   18 months ago, now are breaking through the $400-price mark -- a
   plunge that reflects declining wholesale prices for computer parts,
   such as microprocessors, memory chips and hard drives.
   
   But PC makers also are responding to a profound shift in U.S. buying
   habits: Today's consumers care more about bargains than the latest
   technology for running fancy software, like PC games with 3-D imagery.
   
   "We've seen a massive transformation in the PC business," said Andrew
   Peck, an analyst with Cowen & Co., based in Boston.
   
   Micro Center, a Columbus, Ohio, chain of 13 computer stores, early
   this month began selling a $399 computer under the Power Spec label.
   On Thursday, Costa Mesa, Calif., PC maker PrecisionTec LLC chose the
   same price point for its Gazelle machine, which is for sale over the
   Web through Egghead.com and other companies.
   
   The low prices don't include monitors, which usually start at about
   $150. But they expand a growing sub-$500 market. In March, Millenium
   Electronics Inc. began selling a $499 machine under the Laguna label
   at Sun TV & Appliances and Fry's Electronics stores.
   
   Because of the sharp drop in PC prices, nearly half of U.S. families
   are expected to own a machine by year's end, up from 45% at the end of
   1997, according to Matt Sargent, an analyst with ZD Market
   Intelligence, a La Jolla, Calif., market-research firm.
   
   Many of the new buyers are expected come from families making less
   than $30,000 a year, expanding the pool of traditional buyers, who
   usually come from families making $50,000 or more.
   
   The lower-income buyers "just don't need as much computing power," Mr.
   Sargent said. "They are only willing to pay a certain amount of money
   for it."
   
   But for many new computer users and second-time buyers, those lower
   prices don't necessarily sacrifice computer performance.
   
   Today's computers costing below $1,000 are equal or greater in power
   than PCs costing $1,500 and more just a few years ago -- and they work
   perfectly well for word processing, spread-sheet applications and
   Internet access, the most popular computer uses.
   
   "You don't need a Ferrari to drive 55 miles an hour down the freeway,"
   said John Torres, head of Millenium, whose $499 machine comes equipped
   with a 200-megahertz microprocessor from Integrated Device Technology
   and runs Microsoft Corp.'s Windows 98 operating system.
   
   The low-priced computer trend has caused headaches for Intel Corp.,
   whose microprocessors are the brains for about 90% of the world's PCs.
   
   The Santa Clara, Calif., company became the No. 1 chip maker by
   developing increasingly powerful microprocessors, enabling more and
   more computer users to operate advanced applications for 3-D graphics,
   video and other features. Intel has spent hundreds of millions of
   dollars to promote its Pentium chip since introducing it in 1993.
   
   But Intel rivals Advanced Micro Devices Inc., National Semiconductor
   Corp.'s Cyrix and IDT, which have focused on making inexpensive chips,
   are making inroads into selling chips to makers of sub-$1,000
   computers.
   
   Recognizing the threat, Intel on Monday plans to introduce its
   fiercest response to date to the sub-$1,000 computers, an improved
   version of the low-end Celeron chip it launched earlier this year. The
   original Celeron chip had been poorly received by PC makers because it
   didn't perform as well as similarly priced chips from AMD and Cyrix.
   
   The trend toward cheaper chips has increased concerns about Intel's
   ability to maintain its historically high profit margins. But at the
   same time it's pushing low-priced microprocessors, Intel is hedging
   its bets. The company also plans to introduce a new chip Monday that
   will serve as the brains of powerful corporate desktop machines, which
   will earn Intel fatter profit margins than cheaper microprocessors.
   
   It's not just Intel that has Wall Street analysts concerned.
   
   Several major PC makers, including Compaq Computer Corp.,
   Hewlett-Packard Co. and International Business Machines Corp., have
   reported lackluster financial results during the PC price war. And the
   smaller upstarts, despite their enthusiasm for the new class of
   sub-$500 PCs, also are smarting from the razor-thin profit margins.
   
   "Making money is a challenge," acknowledged Michael Papai, vice
   president of retail marketing for Micro Center, which estimates it's
   selling 3,000 to 3,500 sub-$500 PCs a month.

   Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.


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