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Compaq slashes corporate PC prices

The company cuts prices across the board on its corporate line of desktop PCs by up to 11 percent and introduces new PCs using Intel's Celeron processor.

Compaq doesn't yet have a permanent chief executive, but it doesn't take a brain surgeon to figure out that to stay competitive in the PC business, you have to keep cutting prices.

Compaq did just that today, cutting prices across the board on its corporate line of desktop PCs by up to 11 percent. Compaq also introduced new PCs using Intel's Celeron processor and a space-saving PC that uses the Pentium III processor.

Constant price cutting is a fact of life for PC makers. The main question is whether prices for components--all the pieces that make up a computer--drop as fast or faster than PC prices, and if not, whether a company has a way to supplement revenues lost.

In the corporate market, PC makers have had to offset declines in PC prices by selling more expensive servers and/or services such as technical support. Some recent research reports suggest that Compaq is having a hard time maintaining profits in the server market--it's selling more servers but making less off each sale.

Compaq said it is able to implement the price cuts due to increased efficiencies in inventory management. The company still may not be enough to keep up with Dell Computer, however.

Dell hasn't been immune to the price drops either. But Dell is making up for it by pricing aggressively enough to win customers over from Compaq, according to a research report issued today by US Bancorp Piper Jaffray analyst Ashok Kumar.

"Dell's aggressive price cuts on desktops puts them below Compaq's for the first time in a year. However, in Dell's favor, we also have seen a re-acceleration in component cost declines" in areas such as processors, memory, and hard disk drive prices Kumar said in his report. Kumar sees Dell's growth rate of around 35 percent year-on-year for the current quarter to come mostly at Compaq's expense.

Compaq said the new Deskpro EN Series "Small Form Factor" commercial desktop PC comes with a 550-MHz Pentium III processor and is priced starting at $1,849 for a system with a 17-inch monitor.

Deskpro models with the new Celeron processors are available immediately with prices starting at $949 for a system with a 466-MHz Celeron processor and monitor.

In the first quarter of 1999, Compaq had 19.2 percent market share in the corporate market, including small, medium, and large-sized businesses, compared with Dell's 21.6 percent, according to La Jolla, California-based research firm Infobeads. The previous quarter, Compaq had 22 percent to Dell's 16.6 percent.

To boot, Compaq is facing heightened competition in the notebook market as well. Hewlett-Packard today said it is cutting prices on its OmniBook 900 and some models of the 4150-series notebooks by up to 17 percent in an effort to maintain its price advantage over comparable Compaq Armada notebooks, the company said. Meanwhile, Compaq remains a distant second to IBM for notebook market share for sales through resellers.

Infobeads senior industry analyst Matt Sargent reports that Compaq has indeed improved its inventory management practices, enabling them to sell more up-to-date products without having to dramatically drop prices on older ones. Still, Dell has been able to take away a significant amount of Compaq's share in the desktop market, he said.

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