The Big Squeeze In The Pc Market

Only the giants and the mom-and-pops may survive

When the market for sub-$1,000 personal computers took off a couple of years back, scores of small companies saw their chance: With the top brands focused on more profitable machines, they had an open field. Now, it's closing in. Other than phenom eMachines Inc., the top names in cheap PCs are the top names in PCs: Compaq, Hewlett-Packard, IBM. "As the top brands press down, the guys at the bottom get squeezed to death," says Chuck Cebuhar, general manager of Sears, Roebuck & Co.'s home electronics unit.

Already, Packard Bell is scaling back and free-PC upstart Microworkz.com faces an uncertain future. The market share for PC makers outside the top five has slid from 47% of the U.S. market in 1997 to a projected 26% in 2000, according to Ziff-Davis InfoBeads.

PRICES PLUNGE. This year, suppliers such as Compaq and HP have been attacking the bottom end of the market full force. They're selling PCs for as little as $499--and that's not including the $400 rebates given to customers to agree to sign up with selected Internet service providers. The average price of a home PC has plummeted 48%, to $843, since mid-1997, says ZD InfoBeads. So sub-$1,000 PCs now represent 75% of the market. Now, retailers report, shoppers are using those rebates to buy top brand PCs, not to take home no-names for no money down.

The big guys can afford to play and win at the low end because of falling component prices--particularly Intel Corp.'s aggressive cuts on its Pentium microprocessors. PC makers also have cut costs, outsourcing almost all PC production and paring inventory costs with just-in-time deliveries to dealers.

There are still a few niches where the little guys can eke out a living. Local computer stores that crank out no-name "white boxes" will maintain roughly 33% of the overall market, say analysts. These mom-and-pop outlets do a better job than the national brands when it comes to offering handholding to small businesses.

But the lack of any middle ground makes it next to impossible for entrepreneurs trying to create the next great PC company. Analysts scoff at the plans of Packard Bell founder Beny Alagem to resuscitate near-dead AST Research Inc. And despite the fastest launch in U.S. corporate history, eMachines still has far to go. In a recently released public filing, eMachines disclosed that it had lost $3.9 million in the first half of the year. "You have to be very, very large or very, very small," says Matt Sargent, an analyst with ZD InfoBeads. Staking out territory someplace else doesn't seem to be an option.

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