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Sub-$1,000 PCs stifle DVD growth

DVD has become a silent victim of the sub-$1,000 PC revolution, although the upcoming Sony PlayStation II and expected price declines could jump-start shipments.

    DVD drives have become a silent victim of the sub-$1,000 PC revolution, although the upcoming Sony PlayStation II and expected price declines could jump-start shipments.

    With sub-$1,000 computers consistently accounting for more than 40 percent of all PC sales over the last several months, and sub-$600 systems from companies like Packard Bell and Emachines coming on like gangbusters, PC makers are squeezing out pricey add-ons as they try to eke out a small profit. Accordingly, DVD (digital versatile disc) doesn't appear to be growing as fast as once anticipated.

    DVD offers much more capacity--up to 8.5GB per side--than its predecessor, the 650MB CD-ROM. But the ability to fit data-intensive multimedia games and full-length feature films on one disc comes with a significant price increase, and DVD has arrived on the scene at a time when cost is king with PC buyers. As a result, industry observers believe that DVD will remain relegated to the high-end market.

    "It's up to the system manufacturers, and most of them would kill their own mother to save $20," said Jim Porter, editor of DiskTrend. "As long as the PC maker believes that only a small percentage of his market is going to want a DVD-ROM drive at this time, he's not going to include it except at the high end [of the product line]."

    It's not impossible to fit a DVD drive into a sub-$1,000 system. It just takes trade-offs and doesn't happen often. Low cost leader Emachines, for instance, offers DVD on only one of nine of its consumer computers. The $599 machine comes with a 5X DVD drive and a 333-MHz Celeron processor. For the same price, Emachines also sells a system with a 366-MHz Celeron and an 24X CD-ROM.

    Compaq's Presario consumer computers, even those that cost $1,999, come with CD-ROM as the default option. Users can get a 6X DVD drive, but it costs an extra $59.

    Last year, between 4 and 5 million DVD drives were shipped in PCs or as standalone peripherals, according to Porter, about one-tenth the number of CD-ROM drives shipped. Two years ago, a different research study predicted some 10 million DVDs would ship in 1999.

    Although DVD is expected to catch up and then overtake CD-ROM in the next five years, several factors are stumping widespread adoption, including cost.

    Build-to-order PC companies like Gateway--the first PC company to include DVD as an option in its midrange models--and Dell are experiencing much stronger demand for multimedia peripherals in general, and DVD drives in particular. These companies tend to serve "power users," however, so their experience doesn't extrapolate easily to the industry as a whole. Consumers who build their systems to order are likely more techno-savvy than a typical sub-$1,000 PC buyer, and more likely to invest in DVD now to stave off obsolescence.

    Additionally, so-called direct sales companies worry less about inventory problems caused by unwanted options.

    The average price of Dell's computers is above $2,200, much higher than the rest of the PC market, according to a number of sources. It is a not a total surprise then, that Dell generally ships more DVD drives than the rest of the industry. The cost for PC makers to upgrade to DVD is around $50, estimated Ted Pine, an analyst at InfoTech Research.

    "Build-to-order really changes everything," Pine said, "because as the PC manufacturer, you no longer have to forecast months and quarters ahead when buying inventory. The customer really decides what the PC is going to be configured with, so the customer is managing the inventory and the upgrade cycle."

    "The majority of our consumer systems are sold with DVD," said Brad Blietz, director of product marketing for Dimension, Dell's consumer PC line.

    Blietz chalked up the popularity of the still-obscure technology with Dell customers to two factors. "First would be that the cost premium to go from CD-ROM to DVD is not large," he said.

    "[Second], we've found that consumers have a budget when they're buying a PC, and if the ones they're looking at cost less than the budget, they'll upgrade the peripherals. The budget stays stable."

    Chicken and egg
    Besides being cheap, low-end PC customers today are not demanding DVD-ROM drives in droves, Porter believes, because of a dearth of popular DVD software titles. To a certain extent, the problem is a chicken-and-egg issue: Content developers don't want to jump into the DVD market until there are more drives shipping to consumers.

    Additionally, until recently DVD was slowed by a nasty standards battle that served to delay widespread consumer acceptance.

    The content problem may be alleviated with the release of Sony's upcoming PlayStation II, which will be DVD-compatible. Sony, which has shipped over 50 million PlayStation units to date, is projecting initial shipments of 15 million for the next version of the gaming machine, due in the second half of 2000.

    "If even half of that happens, you have some economies of scale which kick in," which will lower drive prices, Pine said.

    A DVD PlayStation, he added, will also bring more compelling gaming titles to the platform. "This is the gauntlet they have thrown down. They are going to force developers and publishers to make use of the [DVD] real estate. They're forcing the issue."

    The PlayStation push will come at an optimum time for the industry, Pine said, just as prices on drives are already starting to come down. "It appears as though that is actually pretty good timing to catch up on price," he said.