They're Slashing As Fast As They Can

Can't afford a new personal computer? Wait a minute.

In a sink-or-swim scramble for market share, the industry's top PC makers have escalated a noisy price war. On Feb. 4, both Apple Computer Inc. and Dell Computer Corp. slashed prices by as much as 38%. Apple even made 10% cuts on its inexpensive Classics and dropped 13% off the price of the PowerBook 100, its four-month-old notebook computer. Vows Dell sales chief Joel J. Kocher: "We're not going to take the heat off." Neither is the competition. Zenith Data Systems Corp. is ready to cut prices by up to 26% on its desktop and portable models on Feb. 10.

Those are just the most recent reductions. During the past two months, at least a dozen other companies, from IBM to Compaq to Zeos International, have slashed the suggested retail price on their computers. The results are dramatic. Today, a PC powered by an Intel Corp. 80386 microprocessor can be purchased for $1,200. That same PC cost $1,600 just six months ago and $3,500 a year ago.

Behind all this cutting are executives hell-bent on revenge. PC prices began their nosedive in 1991, when such upstarts as Dell, AST Research, and Zeos began to buy market share from industry stalwarts IBM and Compaq Computer Corp. This year, those behemoths are determined to buy it back. Says William Y. Tauscher, CEO of the ComputerLand Corp. chain of computer stores: "Compaq and IBM know in the bottom of their hearts they have to stop losing market share. And the only way that's going to happen is cutting prices again."

SAVVY BUYERS. To be sure, price cuts are nothing new in the PC industry. As new technologies hit the market, older ones slip in value. Historically, that has meant annual price declines of about 10% on new PCs. But the trend didn't hold up last year, when prices dropped 25%, says International Data Corp. The bottom line: In 1991, for the first time in the PC industry's history, worldwide sales dropped 8.3%, to $45.7 billion--despite a 4% increase in the number of computers sold.

The competition can only get worse. Today, one in every four people in the U.S. uses a computer. That means not only that there are fewer new buyers but also that there are more shoppers savvy enough to bargain-hunt beyond such brand names as IBM and Compaq.

Then there's the downward spiral in component costs. Prices on Intel's 386 chips, for example, have plummeted 35% since mid-1991, thanks to new competition from chipmaker Advanced Micro Devices Inc. And a glut in disk drives has caused a 40% price drop in the storage medium in 1991. "There are too many PC companies [and] too many disk drive companies, and there's no differentiation among their products," says Stephen M. Berkley, CEO of computer disk drive maker Quantum Corp. "Layer on that very slow worldwide demand, and you see these huge price declines."

NO LETUP. To cope with lower prices and declining gross margins, PC makers are desperately trying to cut costs. Compaq, for example, has watched its margins plummet from a high of 45% to about 35%. Last year, it posted a $70.3 million quarterly loss, underwent its first-ever layoffs, and ousted Chief Executive Rod Canion. Now, Compaq vows to come back. New CEO Eckhard Pfeiffer says he has not yet made a decision on whether Compaq will match Dell's new low prices. But he vows to "hang in there and battle it out."

His major rivals are hanging in there with him. Take Apple. The shift to lower-priced Macintoshes forced Apple's gross margins down from 51% at the close of 1990 to about 44% at the end of 1991. But that was offset by a 12.9% reduction in operating expenses--chiefly because of layoffs. The end result: a 10% increase in net income for the quarter just reported and another round of price cuts. Says Robert L. Puette, Apple's president of U.S. sales: "We can continually make our products more price-competitive. And we will."

His determination means some companies have to get hurt. They're likely to be clonemakers without the deep pockets to sustain further cuts. Says AST Research Inc. co-founder Thomas C.K. Yuen: "Anyone who thinks this is going to blow away hasn't seen the handwriting on the wall." For consumers, that just means that this PC price war will continue to be a bonanza of bargains.

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