Low-cost battle down to business

IBM (IBM) and Hewlett-Packard (HWP) are crossing swords again, as both companies announce new systems and price cuts that portend a new, potentially ominous, battleground for the business market: sub-$1,000 PCs.

IBM today introduced new models in the PC 300GL series, including a 233-MHz Pentium II system priced as low as $1,249, and reduced prices on its current 300GL systems to as low as $889 for a system with 166-MHz Pentium MMX. Both systems come in at rock-bottom prices for a business computer--all the more significant because top-tier IBM is doing it.

Tomorrow, HP will cut prices on its notebooks by up to 13 percent and is expected to

PC price cuts
CPU	New price
IBM 300GL desktops
166-MHz   Pentium MMX	$849
233-MHz   Pentium II	$1,249
333-MHz   Pentium II	$2,500
HP Omnibook notebooks
133-MHz   Pentium MMX	$1,995
150-MHz   Pentium MMX	$2,330

"aggressively" cut prices on its Vectra business desktop PCs later this month, sources said.

Consumer systems have so far set the pace in the sub-$1,000 market. Corporations have continued to favor higher-priced systems with more powerful processors, to ensure the machines can run upcoming versions of software and operating systems, which have a tendency to get more power-hungry over time.

But the IBM and HP price cuts likely signal the start of the sub-$1,000 business PC, something many in the industry do not want to see since these machines can wreak havoc on a vendor's bottom line.

As a number of analysts have pointed out, there aren't many applications either on the market or coming in the near future that run significantly faster on higher-end computers. In other words, low-cost systems are not a performance bottleneck.

Corporate purchasers will be able to make a PC last three or four years, or longer, while reducing purchase prices from the current average of about $1,500.

There are a number of different environments where the sub-$1,000 "really fits the bill," said Steve Shelton, product manager for desktop systems at IBM. Machines primarily used for word processing are one example. "If you can get that [basic system] and install in the enterprise, manage it in the same way you can with some higher-priced systems so that the total cost of owning the machine is the same other systems, then the sub-$1,000 machines will be of benefit," he said.

On the other hand, Shelton notes, a number of corporate users have budgeted already for more expensive systems and will migrate their desktop systems to the Pentium II because it has a longer life cycle than the Pentium systems. Also, many users are begining to do their own Web publishing and need more processing power for multimedia functions, in which case they would gravitate to the Pentium II systems, he says.

This week's price cutting mania arises from two sources, said John Brown, an analyst at International Data Corporation. First, both Intel and Advanced Micro Devices cut processor prices last week, which generally translates to lower desktop prices. Second, competition has increased among computer vendors for market share and sales.

"It's not 100 percent related to the Intel thing. It is more of a competitive issue," Brown said. "IBM lowers their prices, so HP and Compaq have to follow."

Ominously, this could also impact profit margins for corporate PCs, one the last high-margin bastions.

At HP, tomorrow's price cuts target the OmniBook 5700CT and the 2000CT, sources said. The 5700 uses a 150-MHz Pentium MMX processor and will be discounted from $2,590 to $2,330, a ten percent drop. The 2000CT, which uses a 133-MHz Pentium MMX, will be cut 13 percent, from $2,300 to $1,995. HP cut prices on other OmniBooks in January.

HP will also cut the price on its 360LX handheld computer with gray-scale display to $599. Currently, it retails for $650.

Meanwhile, IBM revealed that its 300GL series computers are based on a new chassis design that allows customers to order systems on a build-to-order, or customized, basis through qualified reseller partners. IBM attributes its ability to offer the new systems at aggressive prices in part to its "Advanced Fulfillment Initiative," in which parts and partially assembled computers are delivered to reseller partners who then custom configure the systems.

The new systems will also be the first to feature "Smart Reaction" software, which monitors hard drive errors and can automatically allow the contents of the drive to be backed up on a separate hard drive.

The PC 300GL will be offered with processors running as fast as 333 MHz, up to 64MB of memory, and a 2.5 or 4.2GB hard disk drive.