Attention Shoppers: Enjoy the High-Tech Price War

Electronics makers have been forced into a bargain basement

After years of driving in the slow lane with a first-generation Pentium processor, Deo San Miguel finally opened his wallet in early April for a more powerful new computer. At a Best Buy Co. (BBY ) store in Palo Alto, Calif., the 23-year-old picked up a fully loaded Hewlett-Packard 933 Mhz Pentium III computer for less than $1,000 and a glitzy Samsung 15-inch flat-panel screen for $500--roughly $1,000 less than the pair would have cost him just months ago. "[Prices] have finally reached the point where I feel like I'm getting a good deal," says San Miguel.

And how. The combination of a slowing economy, weaker demand, and bloated inventories has electronics makers whacking prices faster than a slasher in a teen flick. Indeed, price wars once limited to the mature PC industry have even spread to the recently red-hot markets for products such as handheld computers and digital music players.

TAKEOVER BAIT. Making things worse, many markets are now crowded with too many players. That means the industry's smallest and weakest are getting squeezed--and a wave of industry consolidations and bankruptcies is likely. Even big names such as Gateway Inc. (GTW ) could end up takeover bait. "Expect to see more casualties of war from all that capacity out there now," says IDC's Roger Kay.

True, demand for a lot of electronics gear remains strong. But in the most recent quarter, companies ranging from Palm (PALM ) to Sony Electronics (SNE ) have reported a sharp slowdown in sales growth from last fall's torrid peak of triple-digit growth in the hottest electronics niches. Market researcher NPD Intelect says year-over-year electronics sales grew a measly 3.9% in February, well off the 17.7% leap recorded the prior February.

Just how bad are the price wars? Since October, the cost of flat-panel monitors has fallen 36%; digital cameras are off 22%; and notebook computers have slid 12%. That's only part of the battle. In a further attempt to pry open consumers' wallets and clear the shelves, companies are throwing in freebies, rebates, and instant discounts. "Inventories are coming down; they just aren't coming down as fast as sales have come down," says Circuit City Group (CC ) spokesman Bill Cimino.

Suddenly crowded playing fields aren't helping either. Sales of hot digital goodies, such as cameras and DVD players, soared last year, drawing dozens of new players. By the end of 2000, for example, some 80 companies sold digital music players--up from just 5 a year earlier. So even popular brands, such as Sonic Blue's Rio line, are forced to offer their gadgets up at fire-sale prices.

All those deals are likely to wreak havoc on earnings. Take the suddenly crowded handheld market. With its own inventories soaring, on Apr. 11 Palm slashed prices further, likely eroding its profit margins. Rivals, such as Handspring, also will have to cut prices or lose sales, so analysts figure their profits are coming down as well.

Then there's the PC market. Sales have slowed dramatically because consumers have had little reason to upgrade. Now, Dell Computer Corp. (DELL ) Chief Executive Michael Dell is giving them one: He slashed prices in January even while offering more features. The goal: Use the downturn to gain market share. PCs that sold for $1,200 to $1,500 now go for $800, with extra memory or other freebies. Compaq (CPQ ), Hewlett-Packard (HWP ), and Gateway have been forced to follow, though one rival--Micron Electronics Inc. (MUEI )--has already announced it will exit the PC business.

The industry prognosis? If consumers become accustomed to bargain-basement prices--or if the economy doesn't pick up soon--the bloodletting could be deep. And today's happy consumers could wake up one day to discover they have a lot fewer manufacturers to choose from.

By Cliff Edwards in Palo Alto, Calif.

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