Dell can't avoid low-cost PCs
The PC maker appears to be getting into the low-end PC price wars, tarnishing the company's above-the-fray image.
Dell's average selling price (ASP) per unit recently dropped about 10 percent, to $2,475, according to the company's first quarter earnings statement. Meanwhile, with demand for low-cost systems showing signs of expanding into business sector where Dell has made its name, executives have said that this year Dell will at last introduce PCs in the $1,000 range.
Falling ASPs generally mean declining profit margins. Margins are particularly thin in the sub-$1,000 sector, and vendors are forced to rely on volume to generate profits.
Most analysts remain optimistic about the company's growth potential, but part of that outlook stems from the fact that Dell has enjoyed higher-than-average ASPs. With this advantage shrinking, the view could change a bit.
Historically, Dell has catered to the corporate market, where high-end machines are in demand and profit margins don't depend on economies of scale. But even this market, which can be sluggish in responding to pricing trends, is beginning to jump on the sub-$1,000 bandwagon.
"It has taken the IS [information services] organizations a little while to readjust. They're not as quick to jump on the lower price points as the consumer sector," said Bill Schaub, a senior analyst at Dataquest. "They [Dell] have been fortunate, if not talented, at keeping the high-end client."
"However at some point, it's inevitable, particularly in the commercial market," said Schaub.
To date, Dell has largely stayed on the sidelines as competitors like Compaq, IBM, and Packard Bell watched their profit margins erode as they scrambled to offer rock-bottom prices on their low-end systems.
Dell's low-end system will likely be based on the next generation of Intel's Celeron processor for low-cost PCs. Dell executives have said in the past that the company will probably wait for the next-generation "Mendocino" chip before making a big push into Celeron-based computer systems.
"To the degree they go after Celeron business, it will be because existing customers want a Dell product in that category," said Kurt King, an analyst at Montgomery Securities. "There's definitely an upside in that this market represents an opportunity to gain market share."