Emachines warning may herald another PC price war

Are cheaper PCs for consumers and hard times for consumer computer companies on tap? A warning from Emachines that the market has cooled is a first indication that more price wars may be around the corner.

The No. 3 seller of computers at U.S. retail stores yesterday said the market for consumer PCs has slowed since April and in turn has created a glut of inventory.

In addition, Emachines chief executive Stephen Dukker said the company would cut prices to get rid of the bloat and that Hewlett-Packard and Compaq Computer would likely follow with PCs selling for as little as $399, as they look to get out from under their own inventory problems.

Compaq and HP had little to say on the matter. A Compaq spokesman would not comment on the current business climate, citing the quiet period preceding company earnings. HP spokeswoman Virginia Dimpfl would not comment on the inventory situation or pricing plans, offering only a vaguely positive comment on the company's consumer business.

"We expect we will continue to pick up market share in the months of May and June," Dimpfl said.

Inventory warnings can often be a litmus test for trouble in the PC industry because of the hypercompetitive nature of the business. Excess inventory typically leads to price cuts and stalled sales of newer PCs, which means consumers get great bargains but computer makers suffer financial setbacks.

Toward the end of the first quarter in 1998, Compaq said it was holding approximately 12 weeks of excess inventory; the bloat created a ripple effect throughout the industry.

The company cut prices, prompting other major manufacturers, which also had some excess inventory, to follow. Sales slowed not only at PC makers but also at chipmaker Intel, which cut 3,000 jobs during that time, and at semiconductor equipment makers. The industry recovered, but it took two quarters to return to normal.

Analysts are seeing signs that consumer PC sales have slowed in the past three months

Gartner analyst Charles Smulders says that although the size of the slowdown in Emachines' sales is surprising, much of the weakness reflects 1999 market events as well as saturation in the installed base. see commentary

, although several said they have yet to see conclusive proof of the types of industrywide inventory problems discussed by Emachines.

"Sales have definitely slowed down in the last eight to 12 weeks," said Stephen Baker, an analyst at Reston, Va.-based market researcher PC Data. "It is slow compared to last year; it's not just seasonal."

What's the norm?
Baker and others say they are not sure whether there is indeed a wide-scale surplus of computers building up in the channel, however.

Sales at Emachines began to slip during the third week of April, and problems continued from there. May sales, for instance, were down 18 percent from those in April. Typically, sales fall 9 percent from April to May.

Another factor that may be skewing perspectives is a typical seasonal slowdown, said Roger Kay, an analyst with International Data Corp. PC sales usually peak in the fourth quarter and hit a trough in the first two quarters of the year.

Lately, the cycle has been disrupted. Last spring, for instance, PC sales accelerated as Internet service providers such as CompuServe began to offer $400 rebates on computers when consumers agreed to sign up for three years of service. A number of now-defunct start-ups, such as Microworkz, also garnered attention and drove consumer interest by offering "free" PCs.

In addition, prices hit new lows. Combined, these events drew buyers and interest to the consumer computer market.

During the first quarter of this year, Gateway, among other PC makers, said that consumer PC demand was stronger than expected. No new drivers for demand have emerged in the past months. Therefore, this quarter might be simply an "ordinary" one that looks anemic by comparison.

This year, "there are no new deals, no new rebates, no new price points," Kay said. "Seasonality might be back--with a vengeance."

As far as sales go, however, Kay sees a mix of evidence. Second- and thirdhand reports have indicated that sales have slowed. However, Intel is still barely making enough chips to fill current orders.

Looking for the best tactic
Regardless of the situation at its competitors, Emachines' warning of falling prices may be a self-fulfilling prophecy. If Emachines cuts its prices and HP and Compaq intend to maintain market share, they likely will be forced to follow suit.

Already, Emachines expects the current inventory problems to affect sales in the third quarter. Profit margins should also take a hit for the rest of the year, Dukker said, as the company refocuses most of its lineup toward the cheapest segment of the PC market.

Baker questioned whether even slashing prices would boost sales significantly during the traditionally slow summer months leading up to the back-to-school season in August.

"They've got a six- or an eight-week period where there's not a lot you can do to get customers out and buying," Baker said. "I'm not sure that selling $599 PCs for $399 is going to drive that."

US Bancorp Piper Jaffray analyst Ashok Kumar noted that Emachines may be seeing the worst of the demand picture because it is focused on the U.S. retail market. Kumar said the quarter overall is showing seasonal slowness but that the strength has been in sales of corporate computers, especially notebooks, and in sales to Asia.

"They do not part in any of the segments that are showing strength either from a geographic or market standpoint," Kumar said.

News.com's Michael Kanellos contributed to this report.