Rebates may sell PCs but will erase profits

Not since the free-PC craze of summer 1999 have consumers seen rebates--or deals--like these, say analysts. The cost to retailers, computer manufacturers and Internet service providers, however, could be massive cuts to razor-thin margins on some of the hottest PC models.

Circuit City and Best Buy are at the forefront in pushing rebates and bundles, said ARS analyst Matt Sargent. CompUSA and RadioShack also are aggressively promoting rebates.

For consumers, the rebates mean huge savings. Circuit City on Sunday, for example, started promoting a Compaq Presario PC with 750-MHz AMD Athlon processor and 15-inch monitor for $249, after $850 in rebates: $400 from CompuServe with three-year Internet service commitment, $250 from Compaq Computer and $150 from Circuit City.

"It is the first desktop (retailer) rebate I've seen over $100, which is the pretty common amount," Sargent said. "But when you're jumping up to $150, that's huge. I was shocked when I saw $150 for a notebook a couple of weeks ago from Fry's (Electronics)."

The rebates, when coupled with recent price cuts--especially for notebooks--mean outstanding deals not seen before at retail. Circuit City is promoting a Compaq Presario notebook with 600-MHz Celeron processor and 13-inch display for $699 after $500 in combined rebates from Internet service provider CompuServe and from the PC maker.

Best Buy, meanwhile, is advertising a Compaq Presario portable with 700-MHz Pentium III processor, 14.1-inch display, 15GB hard drive and DVD drive for $1,599 after two rebates: $400 from CompuServe and another $200 from Compaq.

"There was a lot of misforecasting and overemphasis on consumer notebooks, and I think there are an awful lot of them out in the (retail) channel right now," said Gartner analyst Kevin Knox. Manufacturers and retailers had expected a boom in consumer notebook sales, he said, "but that clearly isn't happening."

Knox's conclusion: "I think a bunch of people are going to lose their shirts on these things. Nobody can make money on a $699 notebook even with the (ISP) rebates."

Rock and a hard place
Retailers are caught between a rock and a very hard place because of overeager forecasts for PC sales. They share this dilemma with PC makers, which are watching a stock buildup on dealers' shelves rather than the usual holiday pickup in sales. The industry inventory average is nearly twice normal levels, or about 7.4 weeks, up from less than 4 weeks in September, according to ARS.

While manufacturers can typically absorb rebates as high as $250, "for the retailer, $150 is their margin," Sargent said. "At that point, they're just trying to move the product, so they're not stuck selling it off for $300 come January."

But who pays for retailer rebates is often hard to discern, say analysts. The retailer may offer the rebate, but that deal may actually be a subsidy by the computer manufacturer or a processor maker, such as Advanced Micro Devices or Intel.

"Retailers aren't going to give up a cent, let alone $150, on anything," said Knox. "Still, I think the retailers are starting to feel some concern here they're not going to make their numbers. That's why the rebates."

Not all analysts see this number of retailer rebates as unusual, nor are they surprised by the intensity at which they're being offered.

"There's nothing here we haven't seen before," said PC Data analyst Stephen Baker, although he acknowledged that "$250 rebates is probably higher than we've seen in the past."

Best Buy provides a good example of how rebates can be spread around. The retailer is offering deals with no financing until June 2002 on select PCs sold with a monitor and printer, and many of its best rebates require bundles. Best Buy on Sunday started promoting a Micron 1-GHz Athlon PC with 17-inch monitor and printer for $1,299, down from $1,949 after a $100 price cut and various rebates: $100 for the monitor, $50 for the printer and $400 from CompuServe.

Analysts warn that Apple Computer and Compaq are the most exposed right now, as their inventory levels are highest--11 weeks and 10.5 weeks, respectively--according to ARS. Both companies are the most aggressive with rebates, with Apple offering as much as $500 in coupons and Compaq, $250.

But Baker and Knox both wondered if Compaq is further subsidizing retailer rebates in an effort to clear stock from store shelves. "That further erodes Compaq's margins," Knox said.

Compaq's exposure could carry over to RadioShack, Sargent said. The retailer exclusively offers Compaq PCs "and is likely to be in the same position overforecasting holiday sales," he explained.

Knox said Compaq and other PC makers may be forced to subsidize additional rebates. "With that much inventory out in the channel, I think they might have no other choice. They have to sell it to clear way for new models."

Caught by surprise
This year's oversupply caught virtually every PC manufacturer, component supplier and retailer by surprise, say analysts. While September--the third-highest retail sales month of the year, according to NPD Intelect--showed a normal trend going into the holidays, consumer sales collapsed in October and continued to be slow in November.

Rather than the typical holiday pickup, consumers are passing over PCs for other high-tech gadgets and peripherals this year, say analysts. Preliminary November retail sales data from PC Data shows a 12 percent decline year over year, which Baker described as "about the worst we've ever seen."

Weekly data from OneChannel.net, a market researcher tracking online sales, shows a startling trend leading into the holidays. Online PC sales during the lucrative Thanksgiving holiday week were 31 percent below the year-to-date average, making it the slowest sales period of the year. The week ending Dec. 2, sales dropped 28 percent.

The PC slowdown affects virtually every manufacturer, at a time when most count on robust sales through the holidays. For the two weeks before Thanksgiving, Nov. 11 through 24, online PC-systems sales declined starkly compared to the previous two weeks, according to OneChannel.net.

For the period, Compaq's and Dell Computer's online sales each fell about 25 percent, the market researcher reported. Sony and Apple also took a beating, falling 14.5 percent and 11.9 percent, respectively. Hewlett-Packard's decline was just shy of 11 percent.

Retailers offering rebates is certainly nothing new, but it took on new meaning during the summer of 1999. At that time, rebates from CompuServe and other Internet service providers (ISPs) meant consumers could walk out of Best Buy with free or nearly free PCs. But this year, ISP rebates have been much less visible--until around September and October when retailers started aggressively promoting CompuServe and MSN rebates.

Knox remained pessimistic about the rest of the holiday PC selling season.

"I think this is really turning out to be much worse than even we initially reported that it was," he said. "As we get further along, you're going to see more drastic measures. At Christmas, you could see people giving PCs away."