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Timing the Electronics Market for the Best Deal on a New PC
Scott Olson/Getty Images
Prices for notebook PC's have fallen 18.5 percent so far this year.
Published: May 27, 2006
Lower prices are part of the natural order in the world of electronics. Sometimes, though, the slow but relentless drop in price turns into a torrent. That's happening now in personal computers.
Graphic: Shrinking at the High End
Prices are falling fast on notebook computers, as much as 18.5 percent so far this year, according to statistics compiled by Current Analysis, a market research firm. The bulk of notebooks now sell for less than $1,000.
The lower-priced notebooks are pushing desktop prices down, too. "I would expect even more intense price competition," said Charles Smulders, an analyst with Gartner, another market research firm.
The pace of price cuts has accelerated because a price war has broken out that offers great benefits to anyone in the market for a PC. And that could be a pretty large market. Forrester Research estimates that 70 percent of PC's in use are more than two years old and 90 percent of second, third and fourth computers are even older. The wars started quietly a year ago this week when Acer, a PC maker in Taiwan, re-entered the American market. The strategy was to get into the top tier of PC vendors as quickly as possible, which meant it would grab market share by keeping prices low.
Acer and other makers took business from Dell, which began to look less like the growth company that its investors were accustomed to. Dell's response came earlier this year as it cut prices.
Intel, meanwhile, was losing a significant portion of the microprocessor market to Advanced Micro Devices. Intel's share dropped to 77.9 percent from 81.5 percent in the first quarter of this year, according to Gartner, while A.M.D.'s market share grew to 20.4 percent from 16.6 percent two years ago. Intel is fighting to win back share, which means PC makers use the rivalry to get a price break.
Apple switched its processor to an Intel chip. Apple also makes running Windows applications on a Mac very easy. Owners of iPods are beginning to notice that Apple does more than sell music.
At the same time, Microsoft has pushed back the release of Vista, its new operating system, from before Christmas to early next year. Normally that would slow PC sales. But Microsoft is considering whether to offer incentives for consumers to buy PC's before Vista's release.
Some analysts had expected coming into the year that prices would actually go up slightly. Instead, the average price of a notebook computer dropped to $963 in April, an 18.5 percent decrease from a year ago, according to Current Analysis, which is based in Sterling, Va.
When an electronic device breaks through the $1,000 psychological barrier, sales take off. Samir Bhavnani, director for research at Current Analysis, said 37 percent more notebooks have been sold so far this year. About 60 percent of all notebook computers sold last month were priced below $1,000. He credits Dell, saying, "They love getting down in the mud."
Dell is running a promotion, which it bills as a celebration of its 22nd anniversary, with a $400 discount on PC's, plus a free monitor and free shipping.
Another statistic will tell you just how good consumers have it. While the number of notebooks sold is up 37 percent, revenue growth in the period is up only 15.5 percent, Mr. Bhavnani said. Companies are making less money on each notebook. Desktop computers are literally being given away. Retailers sold 14.8 percent more of them in the first five months of the year, but revenue declined 4 percent, Mr. Bhavnani said. Half of the computers sold for less than $500.
Consider the Hewlett-Packard Compaq Presario desktop offered this week at Office Depot. For $300 you get a PC with 512 megabytes of RAM and a 100-gigabyte hard drive. Office Depot tossed in a 17-inch CRT monitor and a printer.
"The material cost, before the printer, was around $400," estimated Mark Hill, Acer's vice president for sales in the United States. "It's crazy." Not that he's complaining. Acer has gained one point of market share this year by artful pricing.
So how does a consumer play this? As always with electronics, it is worth waiting. Expect even better deals around the Christmas season. But if you need to get one now, you certainly won't suffer. Deals will abound during the back-to-school season, which starts in June just as the school year ends.
Many consumers will end up waiting for Vista, Microsoft's new operating system. Some analysts expect that to keep computer sales from flagging during the year-end holidays, manufacturers will pressure Microsoft to offer a free upgrade to Vista to anyone buying a new PC.
Decide on the particular features you want on the computer. A notebook with one gigabyte of random access memory and an 80-gigabyte hard drive is recommended. Don't worry about the processor. Unless you are using the computer for designing nuclear power plants or playing video games professionally, any one of them on the market will serve you well.
Shrinking at the High End
Why a notebook, rather than a desktop? Convenience, mostly. Desktop models are becoming a relic of a bygone era as the artificial price difference between notebooks and desktops collapse. Notebooks now outsell desktops in stores. IDC estimates that by the middle of next year, more than half of all PC's sold will be notebooks.
Decide on a size. The computers that weigh less than four pounds are considered ultra portables, the kind you take on business trips. Anything heavier is a desktop replacement, perfect for moving from room to room or on a jaunt to the coffee shop. Go to a store to test the heft.
Reflect on how much style you want. As this category matures, manufacturers differentiate their products by making some notebooks look prettier than others. They charge more for anything on the color wheel besides gray and anything that glows.
Then watch the prices at retailers and at the manufacturers' Web sites. The last time you bought a PC, the best deals were probably online. That's not necessarily true anymore. The best deals can be inside the stores because those retailers are using PC's and notebooks in particular as loss leaders to drive traffic.
Here is another business trend that is helping consumers. As the prices of PC's drop, even if retailers sell more units their year-on-year revenue comparisons may drop. Investors closely watch that figure. So stores need to bolster revenue by selling even more of them. They do that by offering even better deals on notebooks because notebook buyers tend to buy other gear like bags and home networking equipment.
The brand you pick will depend on which one gives you the most computer for the price. Current Analysis compiles a "competitive value index" that measures the price of PC's against the features offered. When it looks at computers sold in all channels, the top berths go to Acer, Gateway, Dell and Hewlett-Packard.
Columns providing advice on buying a computer usually have a paragraph or two where the writer pauses and briefly genuflects at Apple. Great computer, they'll say, but — there is always that but — they carry a premium of 20 percent to 30 percent over a similarly configured computer running Windows.
Here comes those paragraphs. However, that required "but" may soon be retired. Gene Munster, a senior research analyst with Piper Jaffray in Minneapolis, compared Mac notebooks with similarly equipped notebook computers running Windows and discovered that the premium for a Mac is now only about 10 percent. "I don't think consumers go through this exercise," he said. The premium shrank, not because Apple cut its prices, Mr. Munster said, but because Apple, in switching to an Intel processor, increased the performance of its Macs, and then didn't raise prices.
A few more consumers may notice. Apple's market share, which climbed as high as 2.5 percent last year before the switch to Intel, has grown from 1.8 percent. Macs compete at the high end of the PC market, where the machines costing more than $1,500 are loaded with multimedia features like TV tuners and bigger hard drives to store photos, videos and music. Some have special chips designed to enhance the performance of video games. Price cuts have not been as deep up there, which is one reason Mr. Munster thinks the premium won't go back to 30 percent.
He said that the media viewing and editing software that comes with the Mac compensates for much of the remaining premium. "Apples are always going to be at a premium," he said.