Everyone Loves a Freebie--Except Dell's Rivals

The company's prizes to buyers may ignite a deadly price war

Free digital cameras and printers. Big rebates. Daily sweepstakes. Computer makers are falling over themselves to get people to buy their boxes, offering incentives even as PC prices plumb new lows. Why the panic? Because the likes of Compaq, Hewlett-Packard (HPQ ), Gateway (GTW ), and Apple (AAPL ) overestimated demand for their products. Up to 500,000 unsold PCs are gathering dust on store shelves and in warehouses, estimates IDC analyst Roger Kay. "The smell of desperation is in the air," says researcher Toni Duboise at PC product-tracking firm ARS Inc.

But at least one PC maker smells opportunity. In an effort to boost its already formidable 28.4% U.S. market share, Dell Computer Corp. (DELL ) is offering customers the chance to win $50,000. During July, consumers who buy a Dell PC are automatically entered in a daily sweepstakes. The move--unprecedented in the industry--could help the No. 2 PC maker increase sales of its consumer machines, which are expected to account for some 20% of the company's projected $8.2 billion in second-quarter revenue.

Better yet, Dell says, the promotion will undermine rivals' efforts to clear inventory backlogs. That could give Dell the one-up in what many fear will be a dismal back-to-school sales season. Under its direct Internet-selling model, Dell keeps only a few days' inventory on hand. Meanwhile, Hewlett-Packard Corp. had 11 weeks of inventory piled up in June--nearly four times the industry average. And European sales of Apple Computer Inc.'s new iMacs have taken a turn for the worse.

Dell has little to lose. In market share reports due on July 15, research companies IDC and Gartner Dataquest are expected to show Dell making continued gains worldwide. That's despite HP's recent takeover of Compaq Computer and Gateway's price-cutting strategies. Dell says it will turn a second-quarter profit, even as rivals lose money. And the sweepstakes' promotion cost only $1.55 million plus administrative expenses, says Dell Marketing Director Erin Nelson, who adds that initial interest in the giveaways has met expectations.

Other PC makers are frantically trying to match Dell's promotion. Apple is offering no-payment financing through October. Gateway Inc. is giving away a free printer or scanner with certain PCs. And HP is offering its own sweepstakes--three $2,000 shopping sprees--and rebates of up to $725. Even as they roll out their own incentives, there is a sense in the industry that Dell isn't playing fair with its sweepstakes. "We offer rebates to all customers, as opposed to the Dell approach that focuses on the lucky winner," says HP spokesman David Albritton.

It's by no means certain that all the giveaways and rebates will work. After all, even fire-sale prices have done little to entice reluctant buyers. Consumers see little reason to upgrade computers as often as in the past. And many corporate customers have yet to replace aging systems. Brokerage Merrill Lynch & Co. now predicts PC sales will rise a measly 2.5% this year, to 132 million units worldwide, down sharply from its earlier projection of a 10.5% year-over-year unit gain. Worse, average prices are expected to decline 9%.

And PC makers clearly realize that incentives alone won't suffice. In the continuing wait for an industry recovery, some are looking elsewhere to shore up the balance sheet. HP is undertaking a major revamp of its profitable printer business and this fall plans to launch dozens of models aimed at further boosting margins. Meantime, Apple is considering releasing a Windows version of its hot-selling iPod digital music player, perhaps as early as the July 17 opening of the Macworld Conference & Expo in New York. Even Dell is considering some changes, including launching its own line of printers. The move could further hurt HP and bring in millions of additional profits from ink sales.

Of course, that still leaves computer makers with the problem of what to do with their rising inventories. With researchers now slashing their estimates for growth in 2003, Dell's sweepstakes' offer could be just the first shot in a battle that will get uglier and uglier. That's good news for consumers now. Down the road, though, another round of industry bloodletting could mean fewer PC makers to choose from.

By Cliff Edwards in San Mateo, Calif.

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