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Price free fall hits high end

The free fall in prices is clearly happening in all PC categories now.

The free fall in prices is clearly happening in all PC categories now: Even high-end machines are dropping down to the $2,000 level.

Micron today released a new, full-featured 233-MHz Pentium II desktop with monitor for $1,999 while NEC Computer Systems has introduced a new system with a 300-MHz Pentium II--the fastest Intel chip available--with monitor for $2,199.

The two new systems are the latest

Avg. desktop price declines, May-Aug.
Pentium II: 36%
Pentium Pro: 4%
Pentium MMX: 13%
Pentium: unchanged
Source: Computer Intelligence
salvos in an escalating price competition among computer makers. In addition to the explosion of the sub-$1,000 PC market created by Compaq and Packard-Bell, high-end computers with the newest and fastest chips--historically costing well over $3,500--are being pushed down to below $2,000 in some cases.

The phenomenon demonstrates a radical shift in PC pricing. Increasing customer demand for cheaper computers, combined with improved manufacturing efficiency, competition over market share, and accelerating processor price cuts from Intel and others are conspiring to raise the performance-price bar on a weekly basis.

The good news for consumers: it's likely to continue.

While price cuts aren't new to Intel, discounting has clearly accelerated the trend in comparison to previous generations of Intel chips. At major, top-tier PC vendors, it took the 486 chip about three years to get into sub-$2,000 computers and about two years for the Pentium to finally make its way to sub-$2,000 systems, noted an Intel spokesman. Amazingly, with the Pentium II, Intel's newest chip, this has happened in less than six months.

"The $2,000 price point is kind of a driver" for the Pentium II market, said Jeff Moeser, vice president of the desktop group at Micron. "You will see some pricing on action on [266-MHz Pentium II and 300-MHz Pentium II] machines coming up."

On one end of the spectrum, vendors such as Compaq, Hewlett-Packard and Digital have been cutting prices to get both business and consumer computers under $1,000.

On the other end, vendors such as Gateway 2000 have been devising ways to get high-end Pentium II systems under the $2,000 price point.

Although the direct vendors such as Micron, Gateway, and Dell have thus far stayed out of the sub-$1,000 derby, the picture will change, added Moeser. "You can expect that the directs are not going to stand by and watch the sub-$1,000 market take off," he said.

This year's price cuts are nothing if not astounding. Systems with a 300-MHz Pentium II sold for around $4,000 at the end of August. Now NEC is selling a similar machine for close to $2,000.

Processor price cuts have been one of the chief drivers behind the price wars. Intel has cut processor prices substantially each quarter, a move that has been closely tracked by AMD and Cyrix. Prices of Pentium II chips running at 300-MHz have been more than cut in half since the chip has been introduced this past spring.

Further processor cuts are due at the end of the month. After these take place, Pentium II prices will be between 24 and 29 percent lower than they were in the first quarter while Pentium MMX prices will have dropped more than 60 percent. End-of-life "classic" Pentium chips have even dropped faster.

"Clearly, Intel wants to move the market to Pentium II fairly quickly and one way to do that is deeper-than-expected price cuts," said Scott Miller, an analyst at Dataquest.

At the same time, manufacturers have been steamlining back-end operations to wring out costs. Compaq, HP, and other non-mail-order companies this year kicked off "build-to-order" manufacturing initiatives to cut out inventory and manufacturing costs. NEC, in fact, converted from being an indirect manufacturer which relies on distributors and resellers to acting mostly as a mail-order company.

This in turn has inspired the mail-order companies to improve their own manufacturing, said Moeser.

These companies are also taking a hit on margins. Compaq admitted in a recent conference call that its sub-$1,000 computers sell at relatively low margins, which is made up in volume.

Joe Daltoso, chief executive at Micron, told CNET in September that computer companies were increasingly turning toward lower-margin business models as a way to land large accounts and increase market share.

"We're taking a more aggressive price position and a more aggressive margin position," said Moeser.

Micron's new Millennia XKU 233 comes with a 233-MHz Pentium II, 32MB of memory, a 2.1GB hard drive, a CD-ROM drive, and a 17-monitor, all for $1,999. The configuration closely mirrors Gateway's G6-233, which was discounted to $1,999 earlier this month. A review of online computer resellers shows that similarly configured systems from other vendors are selling for approximately $2,300 and up.

NEC's new configuration for its Direction PC features a 300-MHz Pentium II, 32MB of SDRAM, a 4.3 GB hard drive, a CD-ROM drive, and a 15-inch monitor. The sale price of $2,199 is currently far below the price of similarly configured systems from other vendors, which are selling for $2,800 and above.