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Mounting sub-$1,000 PC sales hurt margins

The market for low-cost, low-margin PCs will continue to grow rapidly through 2001, meaning vendors may have to compete in other segments.

The market for sub-$1,000 personal computers will continue to grow rapidly through the year 2001, which could have severe ramifications for PC vendors without strong server and workstation product lineups, International Data Corporation said in a report released today.

Three years from now, inexpensive PCs will account for 25 percent of all worldwide PC shipments, up from 12 percent in 1997. The report says that domestic sales of sub-$1,000 PCs to both the corporate and retail markets will grow to over 33 percent of the total market in 2001.

While users will benefit from advances in performance as well as new features at low price points, vendors will have to get used to lower margins, and those who haven't adjusted their business model to account for the growth in this segment will "be faced with significant sales and financial repercussions," said one of the report's authors, senior analyst Kevin Hause.

Gateway, Micron, NEC, and Toshiba are among the mid-sized companies that are trying to grow or start a server and workstation lineups. These companies are currently at a disadvantage compared to companies like Compaq, who can go in to large companies and sell cheap desktop PCs and make money on sales of high-margin servers and workstations.

Already, Compaq has seen its revenue growth slow this year due to lower average selling prices for its PCs. IBM, which reported a 13.4 percent drop in first quarter net income, said that its PC business suffered from "a severe price war that was greater than anticipated."

In the long run, though, Compaq, IBM, and Hewlett-Packard are among those well positioned to survive these price wars.

"The margins are lower on the low-end PCs, [so] being able to sell more high-margin products, be it servers, workstations, or even services, certainly becomes more important to the company's bottom line," Hause said.

Even vendors such as Dell, which hasn't targeted the high-growth, low-margin sub-$1,000 market segment, will still fare well, Hause said. "Dell is seeing growth in server and workstation sales, enabling them to stay aggressive on desktop pricing. That doesn't imply that they've got to go after $900 consumer systems. They can stay aggressive at [higher price points]," according to Hause.