Is $200 the magic number for PCs?

While big-name PC makers like Hewlett-Packard and Gateway offer desktops priced as low as $399, without a monitor, smaller manufacturers are finding an audience by offering less-expensive machines, starting as low as $199.

The PCs don't have Windows preinstalled but rely on software from several companies, including Lindows, that use the open-source Linux operating system, which can be used as an alternative to Microsoft's Windows. Dropping Windows is part of the reason why manufacturers can sell the PCs so cheaply.

These so-called $200 desktop PCs don't always measure up to brand-name competition, such as Gateway's $399 300S, in clock speed or storage capacity. But the less-expensive desktops have been catching on by appealing to consumers and small-business owners who think even the cheapest desktop now has the performance necessary to tackle everyday tasks such as Web browsing, analysts say.

A handful of PC makers and sellers, including TigerDirect, Fry's Electronics and Microtel Computer Systems sell, or have offered, PCs priced around $200. Analysts like Dean McCarron, principal at Mercury Research, believe these manufacturers are chasing a market that, at most, represents a few hundred thousand units right now. That's a drop in the bucket compared with the worldwide PC market's total size of about 130 million units. But the machines' price tags and basic functionalities appeal to enough buyers to make it worthwhile, the manufacturers say.

The most well-known $200 PC maker is Microtel, thanks to its deal with Wal-Mart. The retail giant sells several Microtel desktops on its Web site priced in the $200 to $250 range. At one time, Microtel offered a $199 model. Currently, its least expensive offering is a $229 PC.

The $229 model does not come with a monitor but includes an 800MHz C3 processor from Via Technologies, along with 128MB of RAM (random access memory), a 10GB hard drive, a CD-ROM drive, a modem and an Ethernet card. It runs Lindows OS 3.0.

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Microtel sells more PCs above $200 than below, but the company has found the $200 machines to be especially popular among savvy consumers and business users, company representatives said.

"I find the $200 price crystallizes their thinking," said Rich Hindman, vice president of marketing and sales at Microtel. "They say it's not the fastest processor out there, but what am I going to use it for? If I buy a 1GHz or faster machine, it's not going to make me type any faster."

The sub-$400 desktop isn't a new phenomenon. Companies using inexpensive components and special promotions or rebates have offered such PCs before. But the new $200 PCs sold by Microtel and others are capturing an audience this time around due to the sluggish economy and the maturation of markets in the United States and Europe, which means fewer first-time buyers.

Compared with the C3 processor-based Microtel desktops, which sell for $229 and up, most brand-name manufacturers start around $400 and include, at a minimum, a 1.8GHz Intel Celeron processor, 128MB of RAM, a 20GB hard drive, a CD-ROM drive, a modem and Windows XP. Gateway's 300S offers a 2GHz Celeron and a CD burner for $399, without a monitor, after a $100 rebate.

Less is more
But some PC buyers or small-business proprietors feel they don't need those extras.

Most of Microtel's $200 PCs go to the "buyer who just wants a second or third PC to get on the Internet and browse the Web," Hindman said.

Although the majority of Microtel's $200 PC customers already own one or more PCs, the company also sells them to businesses--including some giants like Boeing and DuPont--and some first-time buyers. The first timers are mainly families with high school-aged children who couldn't previously afford a PC, he said.

"There's an emerging market developing here," McCarron said. "It's tapping into a market below where Intel and Advanced Micro Devices want to play at the moment."

The second- or third-time buyers represent the most flexible consumers. These customers probably already have a newer Pentium 4 or Athlon desktop and are willing to experiment with alternatives to Microsoft's Windows operating system, McCarron said.

But some analysts liken the $200 PC to a canary in a coal mine. It could indicate what's in store for the PC market. While there's still very little sales activity below the $400 range at U.S. retailers, the average price of a desktop sold continues to decline.

The average price of a desktop purchased without a monitor at retail fell to $750 in October from $801 last June, said Steve Baker, an analyst with NPD Techworld.

"Why? The under-$600 market has been growing," he said.

While PC prices will continue to decline as more and more people adopt less-expensive desktops, most analysts don't expect the $200 PC to steal many of those sales just yet.

Because of their performance, which is still limited compared with more expensive Intel- or AMD-based desktops, $200 PCs will actually add unit sales to the overall market, McCarron believes.

Microtel itself has found little overlap. It estimates that only about 10 percent to 15 percent of its $200 customers would have bought a more expensive machine if the $200 model didn't exist, Hindman said.

The Intel or AMD machine should remain the central computer in a household or small business--if it's networked with one or two $200 PCs--for some time to come, McCarron said.

But the $200 PC may not be sitting on the sidelines forever. Chipmaker Via, which has been one of the primary proponents of the $200 PC, believes that the popularity of $200 desktops so far underscores several trends in the PC market.

"There really is a change in the mind-set of the market," said Richard Brown, associate vice president of the Taiwan-based chipmaker. "People feel less compelled to replace their current PC with a faster one, because they feel comfortable with the performance on their current applications."

The long road to success
Via provides hardware bundles based on its C3 processor to help PC makers like Microtel arrive at the $200 mark. Nevertheless, the chipmaker doesn't see this new PC category dominating the PC market anytime soon.

"We see the ($200 PC) expanding the market in the U.S.," Brown said. Meanwhile, "in areas like India, the only way to expand the market is to push the price down."

Thanks mostly to its work in promoting the less-expensive PCs, Via has seen quarterly unit sales increases for its C3 chip during the last five quarters, McCarron said. Via has been shipping between 300,000 units and 400,000 units per quarter. That's enough to give it just over 1 percent of the PC processor market.

Next year, faster C3 chips and better graphics from Via will spice up performance of the $200 category, Brown said.

But gaining wider adoption will still require effort. One challenge is the broader public's unfamiliarity with Linux. While businesses and some consumers are embracing the open-source operating system, it is still something of an unknown for everyday desktop users.

"I think people--consumers--want Microsoft," said Toni Duboise, a desktop analyst at ARS.

But it's hard to find a $200 PC with Windows. Versions of Microtel PCs with Windows XP cost about $70 more than their Lindows counterparts, pushing them to $300 or more. Meanwhile, Linux has been catching up to Windows in compatibility. Lindows 3.0 lets PC owners view Windows files, while other applications such as StarOffice offer Linux PC users the ability to view and edit Microsoft files.

But the most difficult thing to change may be the more-is-better mentality most PC buyers have.

"The $200 PC is an interesting market. There will certainly be a market for them sometime," said Sam Ockman, CEO of Penguin Computer, which offers Linux desktops starting around $700. "We primarily deal with customers that always want the latest and greatest. A much more frequent question for us...is, 'How can I get higher performance' and not, 'How can I save money?'" he said.