PC makers tighten grip on prices

A year after the ISP rebate craze brought down the cost of new PCs to next to nothing, prices have risen, stabilized and then nudged upward again.

According to the Boswell Report, which tracks retail computer sales, average PC prices rose from $1,058 during the first three weeks of June last year to $1,087 during the same period this year. That's about a 3 percent increase.

Component shortages are partly to blame, but PC manufacturers--besieged by increasingly shrinking margins--also are simply unwilling to cut prices.

With PC demand high and component costs increasing, Compaq Computer, Dell Computer and other manufacturers have no reason to slash prices.

"PC vendors have been very reluctant to put lower-end products on the market, focusing instead on the midtier and higher end, which is where you make money," ARS analyst Matt Sargent said.

July 2000 was a stark contrast to last summer, when a flurry of promotions meant some consumers could walk out of Best Buy with an Emachines PC for as little as a buck.

"PCs went through kind of a pricing bloodbath around this time last year," PC Data analyst Steve Koenig said. "Manufacturers and retailers have the attitude they don't want to go there again because there's just no money in it.

"PC prices are beginning to stabilize because pricing is not a differentiator anymore and because they're beginning to hit a sweet spot in the market," Koenig added.

Compared with last year's blowout sales, this year's hold-the-line pricing is striking. PC manufacturers normally reduce prices during the typically slow summer selling season and clear out inventory for back-to-school models.

PC prices "are fairly stable, but that is a concern particularly at this time of year," Sargent said. "June, July and August tend to be slow times in the PC market, and people tend to look for bargains. If those bargains aren't there, there tends to be a slowing of the PC market, which we're seeing right now."

May was the slowest sales month since July 1998, according to PC Data.

Although Compaq and Hewlett-Packard introduced new back-to-school lines in late June, neither company has substantially cut prices on existing models. It's simple supply-and-demand economics, said International Data Corp. analyst Roger Kay.

"Despite seasonal sluggishness, PC demand is high," he said. "Why should PC vendors sell cheaper systems when they can make more?"

With higher component costs, a heavily saturated consumer market, and many buyers choosing a second PC, major manufacturers are pushing heftier rather than cheaper systems.

A good example is Compaq, which last year fought a bitter contest with Emachines over sub-$600 PCs. But Compaq this year has beefed up systems and is slowly raising its average selling price in the process.

Since last summer, Compaq's average retail selling price has increased more than $100, reaching $943 in May, according to PC Data. In comparison, retail leader HP's average selling price was $907 in May.

The component crunch also is taking its toll, forcing PC manufacturers to hold fast to higher prices. Dell, for example, has been struggling to keep revenues on track, despite higher component costs and supply problems.

Screen shortages, for example, have helped keep prices of notebooks and LCD monitors high. For example, a 13-inch TFT flat panel screen, the type found on notebooks, costs manufacturers $500.

This has helped keep notebook price tags fairly high, despite falling prices for other components. In May, the price tag of the average notebook sold at retail, which includes online and catalog sales, was $1,901. Those sold in stores averaged $1,579.

Although gauging the overall market trend is difficult, in the short term, analysts predict slower summer sales as bargain hunters leave stores empty-handed. IDC doesn't expect any price cuts, but the market researcher does anticipate PC sales to pick up with the back-to-school buying season.

"There was seasonality back there in 1998; there just hasn't been seasonality recently because of new products introduced in early 1999 and the nearly free PC moment last summer," Kay said. "That kept demand unusually high for all of 1999."