Sub-$1,000 PCs: The future on a budget

The sub-$1,000 PC occupied center stage this year because it showed how cheap and accessible the online world could be.

Michael Kanellos
Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
7 min read
Two years ago, the Internet came into the public spotlight offering a glimpse of a bright, new electronic future. This year, the sub-$1,000 PC occupied center stage because it showed how cheap, easy, and accessible that world could be.

Like people, pivotal YEAR IN REVIEW events have distinct characters. Some, such as the Treaty of Versailles or the atomic bomb, leave indelible marks on the contemporary scene; while others, such as the discovery of Archimedean water plow, the Watergate break-in, or the invention of transistor, seem fairly unremarkable at the time. The latter is certainly the case with the sub-$1,000 computer.

In comparison to the Internet, the arrival of the low-cost computer stands as a fairly dowdy occurrence. Technologically, the sub-$1,000 PC broke little new ground. It exists mostly because parts got cheaper.

As a vehicle to spread technology, however, the low-cost PC appears destined to define the future. Do sub-$1,000 PCs meet your needs? Inexpensive PCs will likely begin to pop up in corporations and also as the second and third units in wired homes. The cheap computer comes too at a time when population giants such as China and India are rising in economic strength and looking for large volumes of affordable byte-crunching machines.

Advocates of network computers, Java stations, Windows-based terminals, Net PCs, and other low-cost machines will claim--often rightly--that their chosen computing platform either led the charge to ubiquitous computing or invented it outright. The claims might be true, but so far, only the standard sub-$1,000 box has found a buying public.

While the low-cost computer broke down the invisible barrier of public resistance, it also raised uncomfortable questions for manufacturers. Success for PC and chipmakers in the future may depend on the ability to sell high volumes of product at low margins. The vaunted technology gods of today could become the consumer product mills of tomorrow. How these businesses adapt is a question that may not require an immediate answer, but it is not going away.

Coming to market
For years, industry visionaries have told a future where computers would be both powerful enough for complex tasks and affordable for the vast majority of households. This year, without much fanfare, The full-featured sub-$1,000 PC has become a defining fact of life that vision became a reality.

Although initially viewed with skepticism, the full-featured sub-$1,000 PC has become a defining fact of life in the high-tech industry. Systems for under $1,000 will likely wind up constituting close to 32 percent of the retail market in 1997, according to Computer Intelligence. In the beginning of the year, the segment accounted for about 9 percent of sales.

The sub-$1,000 machine of today, however, is a far different animal than those offered less than ten months ago. Then, the segment consisted of close-out computers dumped at fire-sale prices, said Jim McDonnell, worldwide marketing manager at Hewlett-Packard. Current cut-rate machines come with what was known as cutting-edge technology only months before.

"helvetica"="" size="-1" color="#cc0000">HP's McDonnell explains component price slide
Some of this year's hottest selling computers, in fact, came to market for the first time priced below $1,000. "Next year there is a road map for sub-$800 machines and probably sub-$600 machines," McDonnell added.

"There have always been sub-$1,000 PCs. The thing that was new this year was that the sub-$1,000 PC did something useful," said Linley Gwennap, editor in chief of the Microprocessor Report. "The hardware configuration that was $2,000 a year ago is now $1,000, and we're still on Windows 95."

The results have been seismic. Computers have lurched closer to becoming a mass phenomenon. Name-brand vendors such as Compaq have seen their desktop sales grow at three times the rate of the market, partially though the popularity of their low-cost machines. Likewise, the emphasis on cost and volume has given a jolt of energy to processor vendors such as Cyrix and Advanced Micro Devices, both of which scored deals with major Price wars have erupted, and industry consolidation could result manufacturers this year to supply chips for low-cost machines.

At the same time, however, the public's love of low prices has led to a need to make up for dwindling margins with increased volume. Price wars have erupted and show no sign of abatement. Industry consolidation is seen as one of its potential, unsavory effects.

The trend's bellwether has turned out to be Intel. In October, the company announced that it would release a wide variety of chips based around the Pentium II core, including Pentium II-style chips for the sub-$1,000 and even sub-$500 segments.

While the strategy will allow Intel to engage in a greater number of markets, including the potentially lucrative set-top box sector, it also means that the company is no longer working from its "release and discount" chip strategy. In other words, Intel won't merely be concentrating on high-end, high-margin chips that eventually make

Mike Aymor, VP and General Manager, Consumer Products Group, Intel
Intel's Aymar on the $300-$2,000 new computer market
their way to desktops. Instead, the chip giant will design deliberately for low price points.

"We have found that the old model doesn't work anymore," said Mike Aymar, vice president and general manager of the consumer products group at Intel. "A lot of it is cost. It turns out that what you have in mind when you design [a processor] for the $3,000 price point you pay a premium for at lower price points...If we want to get down to $999, which we will do with the Pentium II in the second half of the year, we have to do some radical things."

The question now is what changes the new strategy will bring at Intel. The company will in all likelihood remain the dominant chip manufacturer, but the shift is bound to have ripple effects, which could include lower average selling prices, The question now is how Intel will react potentially lower margins, or additional design work.

"I have no doubt that they will get the Pentium II into a sub-$1,000 box, but getting it into a sub-$700 box will take some work," said Mike Feibus, principal at Mercury Research.. "I think it was something they hoped was a fad." (Intel is an investor in CNET: The Computer Network.)

It all began in 1995
The sub-$1,000 computer really got its start in 1995, according to Nathan Brookwood, principal analyst at Dataquest. Then, rosy forecasts concerning the demand for DRAMs (dynamic random access memory chips) prompted a number of memory manufacturers to expand production capacity. The surge in production quickly led to an astounding slide in memory and memory module prices that continues today.

"Those 16-megabit thingies used to cost $320; now they are $25. It's astounding," he said, "Without the DRAM price breaks, we still wouldn't be

Nathan Brookwood, principal analyst, Dataquest
Dataquest's Brookwood discusses how AMD and Cyrix benefit
thinking about it," he said.

Complementing the slide in memory, prices in hard drives and processors have dropped drastically during the same period. 1GB hard disks, a luxury item a short while ago, now sell for $99 and are in excess supply, according to various sources. Pentium MMX chips sell for around $115 in volume while Pentium II chips, introduced this spring, start at $415. Chips from AMD and Cyrix sell for less.

"All the component prices declined. Intel got more aggressive on pricing too," said HP's McDonnell.

One of the first vendors to take advantage of the market dynamics was Compaq. The Presario 2000 series, released in February, was one of the first major-label full-function sub-$1,000 systems. It was also the first major computer to use the integrated MediaGX processor from Cyrix, which comes at a lower price point than Intel equivalents. Sales took off like a rocket.

"Packard Bell may have started it, but Compaq went after the market in a big way," said Matt Sargent, an analyst at Computer Intelligence. "They made it part of their central strategy. More than 50 percent of their retail sales came from it."

"It was the first fully functional sub-$1,000 PC from a major vendor that offered full-blown performance," added Steve Tobak, vice president of corporate marketing at National Semiconductor, which recently bought Cyrix.

Other manufacturers fell in line, prompting price wars and discounts across the industry. Nearly every major PC maker, with the exception of mail-order giants Dell and Gateway 2000, sells a complete line of cut-rate computers that, less than a year earlier, would have sold for $1,500 and more.

In turn, these have drawn prices down for all systems. NEC Computer Systems, among others, features a sub-$2,000 300-MHz Pentium II computer, a price approximately equal to what the chip alone sold for at wholesale volumes in July.

Unfortunately, the price wars have dimmed the potential for a quick recovery. Sub-$800 computers will start to hit retail shelves early next year. Prices on corporate computers, where sub-$1,000 boxes have not been hugely popular, are likely to come down, according to several analysts.

More ominous is the fact that the industry hasn't come up with a compelling application that makes users migrate to complex Pentium II systems. Consumers are buying computers for Internet access, Dataquest's Brookwood said, a task that can run just as well on a lower-end Pentium-class system.

"There is no real choice between talking machines or a GUI [graphical user interface]. There are no thinking machines yet. We haven't incorporated a ton of 3D into our business memos," he noted. "Without these computing-intensive applications, people are saying, 'Hey, I can spend $1,500 or $2,000 on a machine. I'll buy the $1,000 computer and a really good monitor.'"

If prices stay down, lower profits are inevitable unless they are offset by continued surges in volume. Profit margins on the low-priced systems are about 9 percent, while margins on typical PCs are about 12 to 15 percent, according to Associated Research Services, a research firm specializing in retail channel market information.

Sargent, among others, believes that the end result will be industry consolidation, and the question then becomes which of the smaller players will fall to Compaq, HP, and IBM. Even Packard Bell, he pointed out, has large volumes but low margins.

"You can't overstate the impact that this has had," added Mercury's Feibus. "And it hasn't stopped." 

 related news stories
  Packard Bell retail passes Compaq December 15, 1997
  HP pushes low-cost business PCs December 2, 1997
  Intel touts low-cost chip strategy November 7, 1997
  Sub-$1,000 PC sales soar October 8, 1997
  Acer eyes low-end retail August 26, 1997
  Intel slashes prices across board July 28, 1997