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Dell faces low-cost question

Analysts are beginning to question how long the direct-seller can cling to its strategy while the rest of the PC industry migrates to the sub-$1,000 PC.

Although Dell Computer (DELL) has profited by offering high-end PCs on a "build-to-order" basis, many analysts are beginning to question how long the direct seller can cling to its strategy while the rest of the industry migrates to the sub-$1,000 PC.

Dell has clearly found success with its strategy of attracting technology-savvy consumers interested in machines that feature the latest processor--and generally cost more. And the company has enjoyed tremendous fortune selling PCs to businesses interested in customized systems.

Market research firm International Data Corporation recently concluded that that Dell holds the No. 2 position in the U.S. market, and ranked the Texas company fourth amongst PC vendors worldwide. Additionally, the company yesterday announced a 55 percent gain in revenues for the fourth quarter, attributed in part to rising sales of systems to consumers.

However, analysts question whether that strategy will continue to be as successful in the long term. "It's hard to argue with their sales results, in the short term" said Matt Sargent, an analyst with Computer Intelligence (CI). "In the long term, they will begin to feel the squeeze."

That squeeze is getting tighter every day, analysts say. PCs with a price point under $1,000 currently make up 30 percent of the retail market, according to a recent study from CI, and the share has reached as high as four of every ten machines sold. The study further found that the average price of a PC fell below $1,300 for the first time in the fourth quarter of last year.

Low-cost, full-featured PCs are gaining popularity in the corporate market, as well.

"They have no choice," said James Stone, an analyst with Preferred Technology. "That's the way the market is heading."

Dell has watched from the sidelines while competitors like Gateway, along with Compaq, IBM, Packard Bell, and Hewlett-Packard have either jumped, or been pushed, into the sub-$1,000 pool. Toshiba quit the desktop market altogether, opting to phase out its Infinia line because it found that the market for a high-end multimedia consumer machine is eroding.

In the future, low-cost Internet appliances like TV set-top boxes and network computers will begin to make further inroads in the PC market, offering another bargain for consumers.

Stone said that the low profit margins that come with low-priced machines have so far discouraged Dell from entering the market. "They haven't chosen to get down there because it is there that you get into reduced margins," he said.

According to Stone, Dell's strengths lie in selling build-to-order models. Those strengths could actually be weaknesses when they attack the lower end of the PC market. "I'm not sure that their strategy will let them get as low-cost," he said. "The sub-$1,000 PC is somewhat against Dell's grain, because there is no flexibility."

Both Sargent and Stone say that when Dell chooses to enter the market, its late entry should not cost it too much. "This is a market you recover instantaneously," Stone said. "If you offer today, you sell it today."