Plunging Prices Squeeze Second-Tier PC Vendors

A shift in consumer demands has caught personal computer manufacturers off guard, as they scramble to fill orders

PERSONAL computer sales are booming - so much so that several vendors are running short of their most popular models.

IBM, Compaq, Apple, and others are struggling to keep up with the unanticipated demand. Overall, company officials and analysts expect the industry to ship from 10 to 14 percent more desktop and portable computers this year than last.

"It definitely did exceed our expectations," says Sundi Sundaresh, director of marketing for Hyundai Electronics America's information systems division. He sees industry growth in the mid-teens. "We expect to exceed that. Significantly."

The problem is that to jump-start sales, the industry has had to cut prices dramatically. The result is reduced margins for vendors and distributors alike.

"We're working harder to stay in the same place," says Steve Steinke, senior manager of vendor relations for ComputerLand Corporation. The company is the nation's largest direct retailer of personal computer products and services.

The price drop of personal computers has been precipitous.

For example, a PC with a fast Intel microprocessor (a full-power 80486 chip running at 33 megahertz or 486DX-33, to use the industry's shorthand) averaged $3,200 at the beginning of the year. By October, it had fallen to $2,300, says John Murphy, editor of the PC Street Price Index based in Gibbsboro, N.J.

"They've all been sloping down on price," he says. This year the average price of a desktop computer has fallen about $100 a month. After Christmas, he expects the price to continue to drop about $50 to $75 a month.

Instead of buying cheaper computers, many buyers are opting to spend the same amount of money on better-grade models. This is happening in two ways.

First, consumers are more willing to buy brand-name machines because the top-tier manufacturers have dropped their prices so much.

This summer, Compaq Computer Corporation introduced a new line. It pegged prices so low that the Houston-based PC-maker anticipates a 50 percent or more increase in units sales this year. Hewlett-Packard Company is expecting a sales spurt of 40 percent; Digital Equipment Corporation, 120 percent. IBM may sell more PCs this quarter than in any previous fourth quarter. Its new line of ValuePoint computers makes IBM cost-competitive for the first time with second- and third-tier vendors.

The second consumer trend is to spend the same amount of money but to move up to a faster and more powerful machine.

"The tendency is to buy around price points," Mr. Sundaresh says. The bulk of the company's sales are for products that are under $2,000. But these days, that means a fast 486DX-33 machine complete with monitor, a mouse, and operating software.

These consumer shifts toward more powerful and brand-name computers has enormous implications for the industry.

The competitive pricing from top-tier PC vendors is making it nearly impossible for second- and third-tier makers of PC clones to compete. Industry analysts expect a shakeout in the industry.

Another effect of the consumer move is in the chip area. At the moment, Intel Corporation is the only company that makes a true 486 chip. (Cyrix Corporation of Richardson, Texas, sells a rival microprocessor that it calls a 486, but whose performance falls somewhere between the older-generation 386 and Intel's 486.) As consumers move to 486 PCs, Intel's position grows stronger.

The crossover is already beginning to happen. International Data Corporation estimates that 386-chip machines represented 50.7 percent of all PC shipments this year. That is about double shipments of 486 PCs, which took 27.5 percent of the market. But next year, the research firm estimates 486 shipments to jump to 49.7 percent of the market, while 386 machines will drop to 30 percent.

"We're seeing a greater skew toward the 486 products, especially in the business community," says Roger Richter, president of indirect operations for InaCom Inc., a large chain of independent resellers based in Omaha, Neb. Despite price cuts, the average invoice for a machine is going up, as buyers snap up more memory, better monitors, and larger hard disks for their more powerful computers.

The shift to 486 machines is a boost for the makers of these computer peripherals. A new industry survey by Electronic News forecasts robust growth in 1993. But it is gloomy news for Intel's competitors, particularly Advanced Micro Devices.

The Sunnyvale, Calif., company is still stuck selling 386 microprocessors. It had expected to start selling its own 486 chip early next year. But that plan was thwarted by a federal district court judge, who ruled recently that the company could not use any of Intel's 486 microcode.

The ruling means that Advanced Micro Devices will have to write 486 microcode from scratch. That will delay the company's 486 chip till June, the company says.

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