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Commentary: Weak demand means lower prices

Meta says that Intel's impending Pentium 4 price cut is a response to weak demand for PCs--and therefore Intel Pentium chips--in both the consumer and business markets.

While some Wall Street analysts are saying that Intel's impending Pentium 4 price cut is an answer to competition from Advanced Micro Devices, we believe it is more a response to generally weak demand for PCs--and therefore Intel Pentium chips--in both the consumer and business markets.

See news story:
Intel pushing hard on Pentium 4

The latest industry figures show that silicon wafer shipments are down 25 percent worldwide, an indication of how much demand has dropped in the past year.

Three months ago, Meta Group predicted that Intel would accelerate its normal price-cutting schedule for the Pentium 4 chips in response to decreased demand. Intel is essentially its own biggest competitor. People are basically happy with what they have, and Intel has to find a way to convince them to buy upgraded systems.

The question is whether a steep cut in Pentium 4 chip prices will be enough to stimulate PC sales. In the short run, it is likely to have the opposite effect--depressing sales of the Pentium III machines that now predominate in the market as consumers wait for lower-priced Pentium 4 systems. The clear message for consumers is to delay PC purchases until the less expensive Pentium 4-based machines have a chance to get onto store shelves. In two to three months, it might be possible to buy a PC with a 1.4 GHz Pentium 4 processor for $800.

Looking beyond the current weakness of the PC market, we believe several factors are converging to potentially stimulate consumer demand for new systems in the coming holiday season. The key to increased demand is multimedia. The growing popularity of digital music and pictures, the availability of inexpensive software to edit these multimedia elements, and the use of high-bandwidth connections to support e-mailing digital media to family and friends is the next major consumer-demand driver.

The release of Windows XP, which includes improved support for multimedia, combined with the less expensive Pentium 4 chips, will feed this nascent demand. Increasing availability of high-speed Internet connections to support the download of large multimedia files, falling prices for CD burners that enable people to make recordings of MP3s and other multimedia files from the Web, and general availability of DVD players create fertile ground for new consumer spending on systems.

But will consumers really buy these new toys? While the IT sector has experienced a very sharp economic slowdown, and manufacturing worldwide has also slowed (the United Kingdom just declared its manufacturing sector to be in an official recession), consumer spending has remained surprisingly strong overall--though the PC market has experienced a decline. Worldwide, unemployment has grown at a much slower pace than the number of layoffs would suggest, indicating that people are finding new jobs. Consumers have remained cautious, and consumer PC sales are down, but sales of new cars and other durable goods have remained strong, indicating that people still have money to spend.

We believe that one of the main reasons consumer PC sales have remained depressed is that the systems on the market today do not offer enough interesting advantages over the systems people already own. Moreover, the soft economy has resulted in a more cautious approach to purchasing various electronic "toys" such as PDAs and PCs. A new generation of high-power, low-cost multimedia systems may change this, attracting teenagers and young adults in particular. We expect these new systems, backed by significant marketing activity by Intel, Microsoft and computer makers such as Dell Computer and IBM, will cause consumers to get out their credit cards again as the holiday season approaches.

We expect an escalating PC price war in the fall, particularly in the consumer marketplace. This will bleed into business systems--both desktops and laptops--resulting in greatly enhanced capabilities at low prices as we enter 2002.

Consumers should hold off PC purchases for the next two months and wait for the arrival of new, inexpensive Pentium 4 multimedia systems. Those with little interest in multimedia can look for fire-sale prices on remaining Pentium IIIs as manufacturers and retailers clear out their stock. Those who want the latest toys should expect lower-cost multimedia systems running Microsoft Windows XP on Pentium 4 processors, in time for December.

Corporate buyers should delay purchases where possible until early 2002, when prices should drop in the wake of the holiday buying season and as PC manufacturers refocus on stimulating the business market.

Meta Group analysts Dale Kutnick, David Cearley and William Zachmann contributed to this article.

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