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Low-cost vendors expanding in workstations

Led by Gateway 2000's offerings, the sophisticated, traditionally pricey machines are available by mail order for as little as $3,500 now.

Gateway 2000's push into workstations makes the sophisticated, traditionally pricey machines available by mail order for around $3,500, changing the landscape of a market previously considered the domain of elitist manufacturers and resellers.

It also presents a new challenge to market leaders Compaq and Hewlett-Packard, because the rapid entry of Gateway (GTW), Micron (MU), and Dell (DELL) into the NT workstation arena is likely to generate the same effect that the direct vending had on PC sales: Product shipments will increase and prices will go down.

"The same type of economics that have taken hold [in the PC market] are going to take place in other parts of the market," said Joe Daltoso, chief executive officer at Micron. "Low pricing, large volumes, tough margins." Micron is also becoming active in the Intel-based workstation market.

Gateway 2000 today released the E-5000, a Pentium II workstation with monitor that starts at $3,599. Price/performance-wise, the product compares to workstations announced just yesterday by Micron, Compaq, and Hewlett Packard.

Gateway also announced its NS Series of servers, marking its formal entry into the server market. This announcement follows closely behind the company's recent acquisition of server manufacturer ALR. The NS Series servers offer high degrees of fault tolerance and can use up to two Pentium II and up to six Pentium Pro processors. Pricing begins at $2,499.

The E-5000, like other inexpensive workstations, sits at the low end of the workstation spectrum, but its features generally exceed what is available on an ordinary desktop computer. The base configuration comes with a 266-MHz Pentium II processor, the Intel 440LX AGP chipset specially designed for graphics, a separate 2D graphics subsystem, 64MB of memory, and a 4GB hard drive. The E-5000 line, which ships with Windows NT, can also use a 300-MHz Pentium II, accommodates two processors, and supports 3D graphics subsystems.

"Dell has really shaken up the pot with its ability to deliver high-quality products at a low price, but the other vendors are responding," said Peter ffoulkes, senior industry analyst at Dataquest.

Even so, ffoulkes added that the direct vendors may not have the same magnitude of impact that they did on the PC market. Workstations remain complex machines sold for heavy computing tasks. As a result, customers will continue to require consultants, integrators, resellers, and others in the buying process. Catalog and Web site sales can't displace the need for advice until the market is fairly mature, and those employees raise fixed costs.

Dell will likely succeed here because it has been building up its corporate sales force, said ffoulkes. Still, "it has got to get some reference accounts," he said. Gateway has pledged itself to building its corporate sales as well.

Also, demands customers will make at the high end mean that there will likely always be significant differentiation among the more expensive machines, he said.

Product releases already bear this out. HP's Kayak XW workstation, which is HP's high-end NT workstation, comes with the Visualize fx4 graphics subsystems, a technology transplanted from HP's Unix line that ostensibly provides higher performance. Compaq uses its own chipset and graphics architecture in its workstations, said officials at that company. Gateway, by contrast, uses the AGP chipset from Intel, which any computer maker can license.

HP and Compaq are also looking over their shoulder at other challengers. "HP and Compaq are doing well, but IBM started shipping products later, in March. It is viable that IBM could displace one of the top two," Foulkes said.

NT began to emerge as a workstation platform last year as an alternative to more expensive Unix systems. While lacking some of the features of Unix machines, NT machines cost less to acquire and administer, an argument that's not lost on customers.

"A lot of people are switching to NT as their primary server and upgrading all their workstations to NT," said Rami Abuhandeh, president of BCS Technologies. The company recently has performed a number of NT conversions involving thousands of seats. "For a lot of programs, the platform under NT is just as good as the platform under Sun."