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Summer Net rebates may hurt holiday PC sales

Record-breaking PC growth for the first three quarters of the year has stalled just before the holidays, and analysts are blaming the slowdown in part on the Internet rebate craze.

For many PC buyers, Christmas came in July this year, and that's hurting holiday sales.

Record-breaking PC growth for the first three quarters of the year has stalled just before the holidays, and analysts are blaming the slowdown in part on the Internet rebate craze that drove summer PC sales.

"The Internet rebates got folks to

See special report: PC free-for-all jump a little early rather than wait until the Christmas season to make that plunge, only because there was concern how long they would be around," said PC Data analyst Mark Bates.

Several PC makers contacted for this story refused to comment.

Although the holiday buying season is, of course, far from over, analysts say numbers are already down for the fourth quarter. Consumer PC sales grew at a phenomenal 40.3 percent during the first quarter of 1999 over the year earlier, according to International Data Corp. Sales for the second and third quarters remained strong at 56.3 percent and 43.1 percent, respectively, year-over-year.

But by the fourth quarter, consumer PC sales growth slowed to 16.6 percent, compared with 21 percent growth for the fourth quarter of 1998, according to IDC. Now, retailers and direct PC makers are feeling the pinch.

Internet-rebate participants Emachines, Compaq and other computer makers selling into the lucrative sub-$600 PC market created an almost fire-sale frenzy during July and August, analysts said.

How good were the deals? Emachines chief executive Stephen Dukker during the summer pointed to several weeks where a consumer could walk out of BestBuy with one of his PCs, a monitor and a printer for $99.

Internet rebates typically put $300 to $400 back in the pockets of consumer PC buyers, usually with a three-year commitment to an Internet service provider, such as CompuServe.

"It was very attractive to many people because they got that money back, and they knew they were going to need the Internet service anyway," said IDC analyst Schelley Olhava.

Storeboard, a division of ZD Market Intelligence, said the sub-$600 market jumped to 41 percent of retail sales in July, up from 5 percent a month earlier, just as Internet rebates started to catch on big. Lower prices and outstanding bargains drove sales in this burgeoning market segment, analysts added.

Analysts predicted that the year's gravy train of unusually high consumer sales would eventually end, but few said they expected it to be during the typically lucrative holiday-buying season.

International Data Corp. predicts $5.8 billion in consumer PC sales for the fourth quarter, down from $6.5 billion a year earlier. Although lower-cost systems account for some of the decline, falling sales are taking their toll.

"Beyond Internet rebates, we're a little stupefied what the cause of the slowdown might be," PC Data's Bates said. "The pricing seems right and there's definitely lots of configurations hitting the sweet spots in the price brands. There's brand consolidation at retail, but the major players are still there."

One problem may be the expectation of lower prices that the summer's craze created, but holiday buyers aren't finding them in the stores or online. Internet rebates are giving way to the new trend of branded PCs, such as Barbie PCs or "Blues Clues" machines, according to IDC and PC Data.

The average selling price of a PC sold this holiday season will be $1,280, down from $1,671in 1998, according to IDC. But many consumers, following the summer's blowout sale, expect even lower prices.

During the week of Nov. 21, which officially kicked off the holiday buying season, low-cost leaders Compaq, Hewlett-Packard and Emachines dominated retail consumer sales with, respectively, 39.8 percent, 23.2 percent and 22.2 percent market share, according to PC Data. The three account for most of the PCs sold into sub-$1,000 and sub-$600 markets.

Consumers are also resisting hidden price increases because of "memory prices going way up the first part of the quarter" and "the effects of the Taiwan earthquake, which hurt supply a lot more than people are willing to admit," Olhava said.

In September, for example, Dell Computer said rising memory costs resulted in $75 in extra cost being applied to every PC, greatly decreasing profits.

Rather than raise prices, many PC makers are simply shipping leaner configurations, cutting memory to 64MB from 128MB on midrange systems, for example. Those hidden increases hit the upper end of the market, which is typically stronger during the holidays than at any other time of the year, Bates said.

Another problem is that markets that are typically strong during the holidays are saturated. "We're seeing a lot of the key segments are becoming penetrated, like households with income above $50,000," Olhava said.