Compaq fuels PC price war

Today the No. 1 PC manufacturer slashed prices on its Presario line of consumer desktop computers in an effort to put some distance between itself and competitors such as Hewlett-Packard, which have been gaining on Compaq.

Compaq has now brought

The price cuts come on the eve of a new direct buying program for small and medium-sized businesses as well as the release of new Presario computers based around K6-2 processors from AMD, sources said. =""> While the upcoming Presarios have likely contributed to the cuts, market share battles fueled by dropping component prices are also having an effect, analysts say.

"My opinion is that Compaq is trying to create and protect market share in the face of the aggressive stances that HP and IBM are taking," said Kevin Hause, an analyst at International Data Corporation. "This is also typically what you see this time of year, as systems are set into place."

Prices on PC components such as hard drives and processors continue a relatively steady decline.

Compaq's aggressive price cuts result in some of the most robustly configured sub-$1,000 systems to date. Compaq discounted its Presario 5050 from $999 to $899. The 5050 features a 333-MHz Celeron processor, 8GB hard drive, and 96MB of memory, a configuration that hardly resembles the pared-down sub-$1,000 systems of last holiday season.

Compaq's other Presario, shaved to $999, includes a 350-MHz K6 processor and 128MB of memory.

Typically, sub-$1,000 systems come with less memory, smaller hard drives, and slower processors.

"We're seeing some very compelling systems for under $1,000, and that's going to continue," Hause said. "The lowest floor for top-tier manufacturers is $599, which is going to continue to go down over the next year. That makes a $999 system 4 to 5 price points up from that, which gives a lot of flexibility."

Compaq was knocked out of the top spot in the retail sub-$1,000 PC market last month by HP and IBM respectively, according to data from ZD Market Intelligence, although Compaq retained first place overall for retail PCs (including notebooks).

"HP has shown they want to compete, and they continue to grow market share," Hause said. "I wouldn't expect them to sit on their hands--they're a very powerful vendor that needs to be reckoned with."

Reactive price cuts from top-tier consumer PC makers in the next few weeks would not be unexpected, Hause noted, especially as PC makers try to balance their holiday inventory.

"It's going to depend on what happens with their inventory, but I wouldn't rule it out at this point," he said. "Now it's a matter of tweaking your prices to keep demand high, to build momentum as we roll towards Christmas, so that you can dump out your inventory...so that you're ready in January when you refresh the systems."