PC Price Cuts: Consolidation Sign?
COMPUTERMAKERS are cutting prices again. This week, International Business Machines Corporation reduced prices by 6 to 24 percent on some of its best-selling models. The move follows similar actions by Compaq Computer Corporation and others.
In one sense, these cuts are normal. In another sense, they mark another step in what many analysts believe is a slow, inevitable consolidation in the industry.
Computer manufacturers typically cut prices 10 to 15 percent a year because of technological improvements. "The technology leapfrogs itself," says Rob Howe, vice president of vendor relationships for MicroAge Inc., a computer store chain. "Faster and better and cheaper. The 486 chip last year was a wonderful new technology. Today, we're hearing rumors of the 586 a faster chip.
So far, IBM's price cuts of 6 to 24 percent are in line with industry practice, analysts say. "If you look at the heart of the product line, most of the cuts are 5 to 15 percent," says Rick Martin, a computer analyst with Prudential Securities Inc.
Small signs are popping up, however, that 1991 will not be a typical year. For one thing, the industry is in the midst of its first recession. (Downturns in 1981 and '82 hardly affected the industry because it was so new at the time.) The slump in demand is pressuring computermakers to lower their prices aggressively.
Last month, Compaq announced cuts of up to 34 percent for its computers. In May, Toshiba America cut prices on its notebook computers. The moves apparently led IBM to cut prices earlier than expected. Analysts had anticipated the Armonk, N.Y., manufacturer would cut prices next month, when it introduced new personal computers.
Thus prices may fall more sharply this year - 20 to 25 percent, according to Brian Clarke, a PC pricing analyst for International Data Corporation, a market research company. That's good news for consumers. A year and a half ago, they would have paid an average $2,949 for a Compaq Deskpro 386SX loaded with one megabyte of RAM (random access memory) and a 40 megabyte hard disk. The price jumped up a bit in 1990 because the company added a second megabyte of RAM. Since then, however, the price has fallen b
y a third. Even before its latest cuts, IBM had reduced the price of its high-powered PS/2 70 by one-quarter during the same time period.
The slump in sales and the aggressive price cutting suggest the beginnings of a consolidation within the industry, analysts say.
Dealers, who are already consolidating, face more pressure. For example, while Compaq trumpeted its official price cuts last month, it also quietly reduced dealer discounts from 40 percent to 30 percent, Mr. Clarke says. That means Compaq dealers will either not discount prices as much or they will try to make up for the loss by boosting sales. Two other computer companies, Toshiba and AST, also cut dealer discounts. IBM did not.
As dealers consolidate, analysts are beginning to wonder when the same forces will hit computermakers. Already, margins are under pressure. Last fall, Apple Computer cut its prices dramatically, doubling its market share but hurting its earnings. This week Apple said it would lay off 10 percent of its work force.
Traditionally, big-name computer firms like Apple, IBM, and Compaq have enjoyed hefty gross profit margins of more than 40 percent, says Kiyohisa Ota, a securities analyst for Nomura Research Institute America. Japanese computermakers have gross margins around 35 percent. Makers of IBM clones settle for less.
Mr. Ota expects these margins to fall, just as they fell for the appliance and consumer-electronics industries. Thus, he says the big United States computermakers "will survive, but I am not sure about these small companies."
Mr. Martin gives Apple and IBM the nod for having the best strategy. While Compaq and even several clonemakers are targeting the Fortune 500 corporations, Apple and IBM have the kinds of inexpensive machines that can serve small and medium-size businesses. These companies represent the biggest potential market, he says, because computers have only penetrated 1 out of every 4; in big corporations, 3 out of every 4 desktops already have a computer.