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HolidayBuyer's Guide
Desktops

Tight quarters for PC makers

Computer manufacturers will have little room to maneuver on pricing--and profit--in the fourth quarter, squeezed between potential component shortfalls and sharp-eyed buyers.

PC makers will be hoping for the best during the fourth quarter but must plan for the worst.

With the holiday shopping season nearing, there's reason to feel positive. Businesses are beginning to buy small numbers of PCs again, and consumer sales continue to gain strength. PC shipments are expected to post a healthy profit for the year, according to recent forecasts from Gartner.

But several factors could derail companies that can't make quick adjustments to market conditions. For one thing, higher demand and lower inventory have allowed suppliers of components, such as LCD screens and dynamic RAM, to put the brakes on price cuts. Outright shortages, unheard of during the past two years, have also been showing up, with Intel, for instance, unable to meet requests for some of its processors.

Given the volatility of the market, PC makers must walk a tightrope, with their profits in the balance. If they can get the right components at the right prices, they can in turn offer buyers the kind of values that will have them reaching for their credit cards and purchase orders during the holiday season. If not, they'll be scrambling to stimulate demand by cutting prices too deeply and offering costly incentives.

Manufacturers do have at least one new trend working in their favor--if only it could hold. Because prices on desirable technology, such as portable PCs and flat-panel displays, are lower than in past years, buyers can now see more value in a given PC and aren't necessarily as driven by price alone. Consumers are snapping up notebooks and flat-panel displays at record rates at retail, despite the fact that lower-priced desktops and CRT monitors abound.

"The combination of wireless networking, DVD recordable drives and flat-panel monitors have made people more interested in the core products--desktops and notebooks," said Steve Baker, an analyst with NPD Group. "The evidence is there in the sales numbers. Notebooks have legs, and desktops have turned the corner."

Eye on value
During the holiday season, PC makers will aim to tap into the perception of value, using notebooks, bundles of desktops and flat panels, and computers focused on multimedia, games and photography. Because these products generally carry higher prices, they can help shore up PC makers' profits.

"You'll always have entry-level (PCs), but I think a lot of brands are trying to get to the $799 and $899 buyer by saying, 'For a few hundred more, you can get a lot of extra technology,'" said Sean Aryai, marketing director at Systemax, a PC maker in Port Washington, N.Y.

Systemax and others are likely to launch desktop-with-flat-panel bundles for prices near $900. These bundle would combine a 15-inch flat-panel with a desktop that includes features such as a DVD burner and up to 512MB of RAM, Aryai said.

"I'd expect to see aggressive bundles with a PC and a flat panel," said Tom Anderson, vice president of marketing for HP's consumer PC division. "What the price will be is too early to tell."

Companies do run the risk that this value approach will fail to motivate enough consumers to buy new PCs, especially if component costs don't cooperate--and there's little room for maneuver.

Ideally, manufacturers would slow price decreases or even raise prices in some areas to match slower component cost declines and higher prices on parts such as DRAM (dynamic random access memory). But competition among vendors keeps PC prices headed downward. PC makers are, instead, more likely to reconfigure their PCs with smaller amounts of memory or to change other components to help hold prices steady. They may also back away from the lowest price points in the market.

Some have already shifted their strategies because of changing component prices. Components are expected to continue to decline in price on the whole. But rates of decline are likely to slow to half a percent per week from earlier rates of 1 percent or 2 percent per week, Dell said recently.

HP has raised some PC prices and will slow planned price cuts to stem losses it says were the result of lowering its prices too quickly during its third quarter. Dell originally chose not to follow HP's aggressive prices, but in late August it enacted some small price cuts on PCs.

With component prices and demand firming, desktop prices from brand-name manufacturers are most likely to stay in place, analysts say. Desktops are likely to hover near the $400 mark. Notebooks can be found for as little as $700, but prices for well-outfitted machines are likely to be near $900, said Steve Baker, an analyst with NPD Group.

For $900, consumers should find an Intel Celeron or Advanced Micro Devices' Athlon XP-M processor, a 15-inch screen and a combination CD burner/DVD-ROM drive. Two years ago, consumers were lucky to get a 12-inch screen and a CD-ROM drive for $1,000.

DRAM doldrums?
Volatile memory prices may cause the most angst among PC manufacturers in the short term.

Low DRAM prices have caused memory to jump to 512MB in many PCs. But DRAM began increasing in price again recently, according to Gartner, which forecasts that the average price for a DRAM chip will increase to $5.55 during the third quarter, up from $4.61 during the second quarter. If DRAM hits $6 on average, it will start to pressure prices on memory modules and in turn on basic PCs, said Andrew Norwood, analyst with Gartner. Gartner's prices reflect the equivalent of a single 256-megabit DRAM chip before it is assembled into a memory modules for use in a PC.

PC makers are likely to adjust their configurations to compensate, HP's Anderson said.

"I wouldn't be at all surprised to see that change for the holidays. A (Windows) XP system with 256MB is good enough for most people," he said.

PC makers can also turn to slower processors or smaller hard drives to offset higher DRAM prices. But moving backward on processor speed or hard-drive sizes puts a PC's perceived value at risk.

Supplies of other components could also tighten. Certain LCD panel sizes, high-end hard drives and even DVD burners could be harder to find in the fourth quarter.

"There's a little bit of a shortage right now on high-end components, so prices have pressured upward. We're seeing that on memory, LCDs and the higher-rpm hard drives. Also, DVD burners just aren't coming down as quickly," said Mike Stinson, vice president of Gateway's Mobile Products Group.

Gateway believes those prices will stabilize, but PC demand could continue to be stronger than expected in the fourth quarter, he said.

"Right now, we haven't changed our configuration plans for (the fourth quarter)," said Stinson. "But two weeks from now, that could be different."

LCD prices are expected to decline overall, but constraints on 15-inch LCD panels could affect some companies' plans. Prices on 15-inch panels will probably hold steady or increase, because those panels are likely to be in shorter supply than their larger 17-inch siblings, which are expected to decline in price, said Scott Gray, worldwide product marketing manager for LCD displays at HP.

Cost increases on 15-inch LCDs would put pressure manufacturers' plans for desktop-with-flat-panel bundles. But companies could turn to 14-inch panels. They could also tout inexpensive upgrades from 15-inch to 17-inch flat panels, Gray said.

Ultimately, the fourth quarter will end up as a three-way game of chicken among PC makers, component suppliers and consumers. If sales do not meet expectations, manufacturers will be forced to shift gears and drop prices or risk drops in unit sales and profits.

"They're going to do what they need to do to hit their numbers," said Toni Duboise, an analyst with ARS.