Low-cost PCs forge new mainstream

Low-cost computers--defined as machines selling for less than $999--were initially seen as pariahs by large PC makers and most of the computing industry in general. But today this market is the most vital segment, considered the mainstream and recognized as the source of emerging low-cost companion devices.

Indeed, the market is big enough now that low-cost PCs have generated a three-tiered market segment of their own. $899 now buys a relatively powerful machine, $600 is about mid-range, while the low-cost leaders sell for $399, about $150 more than a personal digital assistant.

Remember the PCs which launched the sub-$1,000 market? AST sold a stripped down, antiquated 486-chip-based design for under $1,000 in May of 1996. Then Compaq came out with a seminal model in early 1997--designed from the ground up to be a low-cost computer--which featured a Cyrix 133-MHz processor and a sizable hard drive (2 gigabytes was pretty big then) for $999.

How things have changed. Today, for $899 Compaq will sell you a PC with a speedy 333-MHz Intel processor and a whopping 96MB of memory and 8.0GB hard drive, among a host of other features. Rather have a $399 PC? emachines will sell you an etower 300c with a Cyrix processor that's twice as fast as the one in Compaq's trend-setter with features considerably more appealing than the original Compaq--and there's plenty of models that fall in between from IBM, Packard Bell NEC, and Hewlett-Packard (HP).

Fast on the heels of cheap PCs has come a market of low-cost peripheral devices, explains Kevin Hause, an analyst at International Data Corp. (IDC). "Companies see it as a very real trend now." As a result, there are low-cost monitors, printers, and scanners, to mention a few, he said.

Though many peripheral makers such as Epson and Umax are making devices for this market, HP's strategy is probably the most radical for an established computer and device maker.

HP announced the Apollo Consumer Products division earlier this month which the Cahners In-Stat Group describes in a report as a "futuristic business model designed to leapfrog ahead of other PC [makers] and peripheral suppliers."

"HP has realized that the consumer PC market is changing dramatically?[its] mission is to produce consumer-targeted printers under $100 using an aggressive business model explicitly linked to low-end, sub-$700 PCs," Instat says.

Though heavyhitters such as HP and IBM have jumped in with aggressive strategies, low-price leader emachines--like AST and Compaq before it--has had a lot to do with waking up the PC market again and reinvigorating it.

Segment has come a long way
"We're seeing customer registration data that shows first time buyers are at 56 percent [in certain sales channels]. We haven't seen this since the 1980s,"said Stephen Dukker, CEO of emachines.

Indeed, emachines has a lot to crow about. Despite just entering the market in the last quarter of 1998, it recorded sales which put the company in the No. 6 spot in the retail market, right behind Apple Computer, which had 6.3 percent.

emachines does not intend to let up either. It plans to deliver high-performance machines for under $600 soon, which Dukker believes will be all the computer many people need.

The new low, low-end market has some unforeseen benefits, he adds. "Customer behavior is very different at $500 than it is at $1,000."

He sees about half the rate of returns and a psychology where customers are willing to deal with some of the intrinsic headaches of PCs. The reason: They?re getting a machine for much less and therefore don?t expect quite as much.

Dukker maintains that there are essentially two market needs. One very high-end segment, the $1,800 to $2,000 range, caters to professionals and enthusiasts. This is a market Intel?s upcoming Pentium III will dominate.

Then there?s everyone else. Below the high end, he says, there is little difference between PCs. "Whether you have a 400-MHz processor or a 450-MHz [processor], you don?t get any faster Internet access," he says.

Indeed, Internet access is driving the market for many buyers now and in some respects has turned the PC into an appliance as it drives first-time sales. "First-time buyers of a PC are looking for Internet access," says IDC?s Hause.

emachines isn?t alone. Compaq is now marketing many of its home PCs as "Internet PCs" and will continue to do so, since executives there see Internet access as the "killer app" of the late 90s and beyond. As an example, the Houston company now offers new Presario models standard with high-speed DSL modems.

All of this potentially opens the door for a new breed of information appliance which offers only the bare essentials a user would need to access the Internet with a basic, yet very usable, set of applications such as word processing and email.

Surprisingly, some of the most dire predictions are coming from established computer makers. IBM: "After more than 15 years as the center of the computing universe, the PC is about to give way to a new breed of...[specialized] devices that will dramatically change the way people communicate and share information," according to a statement made last week by Dr. Paul M. Horn, senior vice president of IBM Research.

Added Hewlett-Packard: "The PC is a pretty crude device, hard to use, and so 'general purpose' that very few of us use more than 5 percent of its capability," according to Lewis Platt, CEO of the computer giant.

Even more interesting is that none of this would necessarily be tied to the so-called Windows-Intel Juggernaut. TV set-top box giant TCI "could deliver [applications] or an appliance maker might sell a box with an operating system besides Microsoft?s Windows," said Hause. Such an appliance is expected from at least one startup vendor this year, say sources.

The box could be powered by a low-cost Cyrix chips or any of a host of dirt cheap RISC chips.

No matter the size or shape of these devices, one thing is certain: Low-cost computers are making everyone in the industry rethink the true value of a computer.