Emachines gains on top PC makers

Emachines has shot from virtually nowhere to become the fourth-largest PC supplier in the retail market, passing such established players as Packard Bell NEC and coming within one percentage point of IBM. The company claimed 9.9 percent of the market last month, according to PC Data's February 1999 report.

Amazingly--and much to the consternation of larger, long-established competitors--this has happened in only about four months. Last November, Emachines had no market share to speak of and was virtually unknown. Few makers in the history of the personal computer have seen this much growth this fast.

An earlier report from ZD Market Intelligence for January 1999 put Emachines in the No. 5 retail desktop PC position with 7.1 percent of the market. The retail market sells mostly to individual consumers, home businesses, and small businesses.

Though these numbers exclude direct marketing giants such as Dell Computer, Gateway, and Micron, which aggregately sell a large number of PCs to these same kinds of customers, Emachines has still come a long way in a short time and shaken up the market as a result.

"There's no getting around the fact that they've really changed things. They have forced retailers and [PC makers] to address the sub-$600 market sooner than they were ready to do," said Stephen Baker, senior hardware analyst at PC Data.

The company shipped approximately 300,000 PCs in the first quarter of 1999, up from 150,000 units shipped in the fourth quarter of 1998 when it entered the market. In the second quarter, the company plans to boost shipments to more than 400,000 units.

Stephen A. Dukker, chief executive of Emachines, said that it intends to ship between 1.7 miillion and 2 million boxes in 1999 and aims at a 10-percent gross profit margin on sales. The company has also said it intends to go public at either the end of this year or early next year.

To boost volume, Emachines also plans to enter the Chinese market later this year, according to Dukker. He expects the Asian country to generate an additional 1 million sales.

Emachines sells boxes priced at $399, $499, and $599, and its PCs are found more and more prominently at retailers such as Circuit City, Staples, and online resellers such as Computer Discount Warehouse.

Doubts persist
But while Emachines' success demonstrates the incredible potential for sales in this new market segment, doubts still persist about ultra-low-cost producers' chances for success in the long run.

Echoing comments from other analysts, PC Data's Baker says that "it would seem that it would be difficult to make money at this stage."

Dukker takes strong exception to such sentiments, insisting that its business model, built from scratch for this market, is structured to turn a profit with low-cost machines. "At $699 you can make a lot of money. Natural margins allow us to make money," he said.

Some buyers are also worried about the level of support and quality at this price. CNET News.com has received some emails which indicate that there are still kinks to work out.

"They were advertising a complete system with monitor for $499 with rebate. However, when I tried to buy one from a retail outlet I found that [these systems] did not exist. Contacting the company left me even more frustrated," said one information systems professional at a large telecommunications firm, reflecting a few other complaints.

Another user complained of a faulty hard drive that he couldn't get fixed.

But CEO Dukker claims that his return rates are half of more expensive machines. In the first quarter, "Emachines continued to report a dramatically low return rate of under 4 percent, less than half the industry average, which indicates not only superb product and support quality, but that people are more comfortable with the purchase of a PC at the Etower's low price points," the company said in a statement.

Other worries center on the threat of excessive competition in this ultra-low-end segment. This could eliminate much of the precariously thin margins Emachines is banking on. Microworkz recently introduced a $299 PC that, to some extent, undercuts Emachines offerings. (Though, the Microworkz Webzter Jr. does not come with a floppy or CD-ROM drive, likely forcing many customers to pay for a more expensive system.)

Growing consumer demand
Doubts aside, the new computer maker has unquestionably struck a vein of latent consumer demand. Approximately 51 percent of the first-quarter Etower sales through consumer electronics retailers were to first-time PC buyers, compared to industry figures that were slightly more than 25 percent during 1997 and most of 1998, Emachines said.

"These new 'first-time' buyers reported annual household incomes at 69 percent between $20,000 and $34,000, and 31 percent between $35,000 and $49,000. This is substantially below the $50,000-plus household income levels reported by PC owners in 1997 and 1998 surveys," the company said.

Emachines is also tapping into a need for a second computer in the home, according to PC Data.