The rise of the sub-$500 PC is expected to put further pressure on the traditional PC vendors as they seek to find further cost savings that will enable squeeze margins to remain competitive. Merrill Lynch & Co figures Dell Computer and Gateway will be least hurt as they already act as their own retailers and are able to recoup revenue from the sale of high-margin software and other peripherals around the box. Companies with indirect or mixed models such as Compaq, IBM and HP where the channel captures more incremental revenue will feel the most pressure. Compaq, with 30% of its sales going to consumers and struggling with its channel strategy could be hit hardest while HP and IBM have proved they can make money with their current cost structures.
The brokerage believes that the key question is whether new application technology such as broadband access will come soon enough to kick-start significant new high-end sales which can offset this trend. Retailers, it says, make very little money on PC hardware (single digit gross margins at best) and essentially have no more margin to give up. Microprocessor prices are down to $100 from $200 and 64MB DRAMs cost around $5; further price declines would be immaterial to end-user prices Merrill Lynch says, noting that LCD prices have increased due to constrained supply.
In the meantime, leading low-cost PC seller E-machines is constrained, with retailers on allocation, while new players are jumping in from left, right and center including Mitsuba, Future Power and AST. The best opportunities lie overseas where PC penetration in households is nowhere near the US’ 50% levels. The internet will drive uptake once online access costs – such as the UK’s metered system versus flat rate local calling charges – are addressed.
