Spring cleaning for PC makers

April was one of the worst PC sales months in recent years, with sales down 22.5 percent for U.S. retailers, leaving the largest retail PC seller, Hewlett-Packard, with 10 weeks of inventory for Compaq PCs and seven weeks for HP PCs, according to NPD Techworld. Normally, three weeks is considered ideal.

Sony's inventory was also slightly higher in April at five weeks, up from 4.5 weeks a year ago.

With little improvement seen in May sales, analysts expect PC manufacturers and retailers to begin aggressively discounting PCs to clear inventory of current PCs and prepare for new back-to-school models.

PC makers have already begun to take action by adding a new round of rebates, given to customers who buy a PC bundled with a monitor and printer.

HP has lowered some desktop models up to $100 in the past two weeks, while others such as Sony have made more modest $50 cuts, according to ARS, a firm that tracks retail sales. These new lower prices are a direct reversal of the round of PC price hikes seen earlier in the year.

But if these price cuts and rebates don't motivate demand, manufacturers will be forced to use a more aggressive measure--the instant rebate, said Toni Duboise, desktop analyst at ARS.

So far, manufacturers "haven't taken the extra step...where we're seeing instant rebates," she said. But "that's the next step we'll probably see in the next few weeks."

Instant rebates, which haven't been seen much since the 2001 holiday selling season, typically reduce the price of a PC by $50 or $100 at the time of a sale.

They are powerful incentives as they reduce the out-of-pocket cost for a PC, Duboise said.

The prospect of a $799 PC suddenly becoming a $699 purchase is more satisfying to most customers than collecting receipts and mailing away for a rebate check.

Drastic measures
Indeed, HP will have to do something drastic, its senior executives said, to reduce its inventory.

The company, which plans to roll out its summer PC lineup for both HP Pavilion and Compaq Presario PCs at the end of this month, will make adjustments to reduce its inventories, HP President Michael Capellas said at a meeting with analysts in Boston earlier this week.

"HP has seen slower-than-anticipated sales...in the consumer market," Capellas said. But "we will adjust sales and drive inventory down."

But even steep rebates might not be enough to pull people away from the beach this summer.

"You're in a tough spot this time of year...people are on vacations. It's tough to get people to think about buying" a PC, NPD analyst Stephen Baker said.

Sales may not increase much until the end of the year, Baker said.

Because of this, "Indications are that manufacturers will rebate PCs more steeply through the summer and back-to-school period," he said. "You may be talking about some aggressive promotions through November, depending on how sales fall out."

Meanwhile, the PC market faces a more fundamental problem, analysts say, in balancing the need to adopt the latest and greatest technology with slowing sales.

While PC lifecycles--the amount of time a company or individual keeps them before upgrading--are lengthening, the speed at which chipmakers Intel and Advanced Micro Devices introduce new chips and other technology has not slowed.

Even though new products such as the new 845G chipset from Intel are considered major improvements, they often come so close to other chipsets that it can be difficult for PC makers to keep up. A chipset provides the backbone of a PC, shuttling data between the processor and memory, and controlling input/output functions.

Many manufacturers, like Sony, try to slow things down by picking and choosing components. The company tends to stay with more mid-range processors, for example, instead of trying to offer the latest speeds.

As the PC market matures and people keep their machines longer, manufacturers could learn some lessons from consumer-electronics makers, Baker said.

These companies have learned to profit in markets that sell a smaller number of products, such as color TVs, by making more gradual changes and keeping models on the market longer.

"If the length of time that people own computers is increasing, you can't be changing your models as often," Baker said. "Who replaces their TV every three years?"