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Will Pentium III ease the low-cost PC war?

Despite the surge in demand for sub-$600 computers, high-end Pentium III-based PCs have managed to rack up "respectable" sales among consumers, according to one market research firm.

Despite the surge in demand for sub-$600 computers, high-end Pentium III-based PCs have managed to rack up "respectable" sales among consumers, according to one market research firm, providing some hope to PC makers who have been pummeling each other in the low-cost PC arena.

Systems based on the Pentium III processor, which debuted in February, accounted for approximately 9 percent of U.S. retail computer sales in March and have helped raise average selling prices for consumer boxes, said Stephen Baker, computer analyst with PC Data.

Among Windows-based PCs, Pentium IIIs captured 9.7 percent of the retail market, he added. As a result, average consumer PC prices edged up toward $1,000 in March. For the previous two months, prices averaged around $950.

"It's not doing badly. It has been respectable," he said, adding that the rise in average selling prices in retail systems can be traced to the Pentium III.

"Corporations are buying them in general. They are making it easier to pick up the PIII and they are pricing it right above the PII," said Roger Kay, computing analyst with International Data Corporation. So far, the biggest difficulty manufacturers have had in selling Pentium III systems has been the existence of Pentium II computers. Buyers looking for bargains have been waiting for inventory-clearing prices for these machines.

Although Pentium III computers have only been available for a few weeks, the sales figures could provide a speck of optimism for manufacturers, which have been beating each other up with low cost machines.

Overall, PC unit sales are still growing at 15 percent but prices are descending at 10 to 15 percent, according to Richard Gardner, PC analyst at Salomon Smith Barney. The major PC manufacturers "need to grow units and revenues at significantly above market rates in order to achieve current consensus expectations," he said.

Some believe that the picture is actually more bleak because of sluggish demand among corporate buyers.

"You almost have to have 25 percent growth in units to have any growth in revenue," said Matt Sargent, computing analyst at ZD Market Intelligence. PC Data tracks mail order and retail sales, but not sales from direct vendors such as Dell Computer and Gateway. The statistics also do not include PCs that go through business and corporate sales channels.

While March figures aren't available from Market Intelligence, the average price for a retail computer dropped from $946 in January to $936 in February while unit sales rose. The average price for commercial desktops, however, rose from an nadir of $1,204 in January to $1,251 in February although demand dropped off. The average price for a commercial PC in December was $1,290.

Kay concurred. Pentium III sales might bolster bottom lines now, but price erosion is inevitable.

"There is no stopping the relentless price decline," he said. "The performance segment is going to drop down until in 2002 it is below $1,500."

Intel released the Pentium III in February amid a $300 million marketing campaign and a controversy surrounding its "serial number" feature. On Sunday, the company cut prices on the 500-MHz and 450-MHz Pentium IIIs by 8 and 17 percent. Even with the cut, the chip costs more than Celeron or K6 chips from AMD. Likewise, computers incorporating the chip cost more as well. A 550-MHz is slated for May, said sources.

So far, Pentium III systems have enjoyed a faster acceptance rate than Pentium II or Celeron-based systems, Baker said, but neither comparison is really appropriate.

The Pentium II, which occupied 4.5 percent of the market when it debuted in May 1998, was more expensive, relatively speaking, than the Pentium III. Celeron processors, meanwhile, received tons of advance publicity, nearly all of it bad. Celeron PCs accounted for around 4 percent of sales in the first month of availability.