Odyssey, a San Francisco-based market research firm, today issued a report warning computer vendors and retailers that sales of sub-$1,000 PCs could hurt their profitability, though vendors such as Compaq dispute this.
According to Odyssey's research, vendors will only sell an additional 1.5 million more low-priced PCs than if they had only offered higher-priced systems. The extra volume from sales of sub-$1,000 systems, Odyssey said, can't make up for the decreased profit margin on these systems.
Traditionally, PCs sold at retail have been priced well over $1,000 and typically in the $2,000 to $3,000 range, offering vendors a profit margin of about 12 to 15 percent. Sub-$1,000 PCs, on the other hand, offer a profit margin of only about 9 percent, according to Associated Research Services, a research firm specializing in retail channel market information.
Compaq and Packard Bell are the two strongest players in this market segment. Compaq accounts for about 60 percent of all sales in the sub-$1,000 segment, according to a recent report from Computer Intelligence. (See related story)
In the past Compaq executives have stated emphatically that they have carefully engineered their push into the sub-$1,000 consumer PC market to avoid profit pitfalls. The low-cost Compaq 2100 Presario PC series are designed from scratch to be low-cost computers. Typically, PC manufacturers have cut the price on systems originally designed as higher-end systems to bring them down to lower price points, cutting into profit margins.
Compaq's systems are designed from the ground up to pack in features such as CD-ROM drives, large-capacity hard drives, modems, and plenty of software.
Still, Odyssey says 69 percent of PC purchasers surveyed are willing to pay extra for the latest options and fastest processors. Odyssey's results are based on a survey of 1,001 randomly chosen subjects interviewed by telephone.
"Consumers that plan to purchase a computer expect to pay--and would have paid--more for the features they want, so manufacturers are leaving money on the table," said Nick Donatiello, Odyssey's president, in a prepared statement. "With sub-$1,000 PCs, manufacturers have ripped the floor out from under their price position, probably unnecessarily--and they won't get the number of new customers that will make this strategy a winning one."
Whether the sub-$1,000 PCs are profitable or not, Compaq has seen its market share increase from 13.5 percent to 18.8 percent in the U.S. and from 10.8 percent to 14.2 percent worldwide, according International Data Corporation's figures for the third quarter of 1997.
Curiously, while most subjects wanted PCs with Pentium processors from Intel, one option not deemed necessary was a Pentium MMX processor. "MMX" technology requires software programs tailored for use with MMX in order to realize any acceleration of multimedia functions, and so far, there are a limited number of such programs.