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No doubt that you have heard about the recent trend towards low-priced PCs. Falling memory, monitor, and peripheral prices, combined with the fact that the newest software doesn't need the newest processor anymore, have all contributed to this downward trend.
Low-priced ($1,000) PCs seem good for everybody--on the surface. These machines help attract the 36% of Americans who still do not have a PC. They are perfect compliments to a faster, more expensive machine. But although consumers may be gaining in the short term, the industry definitely seems to be hurting from it.
As if to prove the point, Toshiba discontinued its Infinia line late last year, citing low-priced PCs as the reason. Compaq Computer, the company that started the low-price PC trend, announced earnings would be off the mark for Q1 '98. Intel, the largest chipmaker, announced that its earnings would be 10% off expectations, the worst decline in earnings it has ever experienced. And more announcements are destined to come.
Why? Although the ever-decreasing prices of RAM, mass storage devices, monitors, and peripherals have helped the downward trend of PC devices, major OEMs (original equipment manufacters) have had to cut their margins drastically to get their PCs under the $1,000 mark.
These major OEMs have sliced their margins almost to the point where their margins are as low as the little OEMs that had low margins to begin with. The major OEMs should be able to weather the low margins, as the sub-$1,000 PCs have yet to cut into a major part of their profits. But to the little OEMs, to which low prices and low margins are customary, the downward trend of PC prices may well be compared to a death march.
As the large OEMs continue to cut prices, little OEMs will be squeezed out of the market, looking at their evaporating profits, and eventually death.
What are the OEMs going to need to get back to the profit and revenue levels of just two years ago? In a word: volume. PC makers are counting on the fact that with the trend towards these lower-priced PCs, the PC buying cycle will change from a once every two years cycle to an annual cycle. According to them and the analysts, this will create a volume wave. True, but this volume is not going to change the fact that Intel's profit per average chip will go from $200 to $45. If you do the math, this extra volume is not enough by itself.
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