Price War May Transform The Computer Industry

Weak personal computer market and cheaper semiconductors are giving aggressive edge to competition between computer manufacturers

THESE days, even the computer ads look like clones.

"New Lower Prices." "Grand Slam Savings." "Prices Cut Again!" they scream. The August edition of Computer Shopper, an industry catalog, confirms what everybody already knows. Personal computer (PC) manufacturers are waging a price war. If it continues - and virtually every analyst expects it will - the industry will take on a radical new look.

All this is good news for the consumer.

Solidtech Inc., a small vendor in Scotch Plains, N.J., has cut prices by $20 to $350 since May. Gateway 2000, a feisty South Dakota vendor, sold its 486SX-25 model for $2,395 in May; now, it is $1,895 (albeit with a smaller hard-drive).

"Competition is pretty tight out there," says Kris Montoya, sales manager for Centrix Computer Inc. in Industry, Calif. The vendor sold a top-of-the-line 486-50 personal computer for $2,745 in May; today, it is selling for $2,515 with a free bundle of software thrown in.

John Murphy, who publishes the PC Street Price Index, calls it the most precipitous price-slide he has seen. "We've got competition all over the place," he says.

One reason is the price cutting among semiconductor manufacturers. Late last year, Intel Corporation sold its 486SX-25 microprocessor for $333 apiece (in quantities of 1,000). Today, it is $119, Mr. Murphy says.

The bigger reason for computer discounting is the weak personal computer market. Instead of the double-digit growth the young industry enjoyed in the 1980s, growth in unit sales has slowed in the '90s. Bruce Stephen, director of PC hardware research at International Data Corporation, predicts unit sales will be up only 5 percent this year. Prices have dropped so far that total sales in terms of dollars will actually fall 2 percent.

"The PC market is maturing," he says. "There's less opportunity for growth.... The reality is that the companies who are operating on shoestrings or are particularly exposed and battered by market conditions will probably either retreat from the market or, in the worst-case scenario, fold up their tent."

Industry executives agree.

"I see a big shakeout in this industry coming," says Bill Hayden, chairman of CompuAdd Computer Corporation. "It's going to take six months to a year." But small companies and eventually big ones will fall out of the business, he predicts.

The biggest initial losers may not be American but Asian. A study by the Taiwanese government reportedly predicts that 60 percent of the nation's electronics companies will go out of business by 1995. Hyundai is moving its PC operations from South Korea to the United States.

Soon, all clone makers will find it difficult to compete on price alone, analysts say. Brand-name companies in the US are nimbler in offering new products. And they have narrowed the price gap significantly. Compaq Computer Corporation - long a leader in high-quality but costly machines - became a price leader last month when it slashed prices on its existing units and introduced a new line of low-priced computers. Even mighty IBM cut PC prices by 20 to 30 percent last week. It also hinted strongly that it will introduce a new low-cost line this fall.

These first-tier companies, along with Apple and large competitors in Japan and Asia, will probably survive, analysts say. They have the deep pockets to endure a price war. Their diversified product lines and continuing research will allow them to move into new markets. But among the second-tier firms, analysts say only Dell Computer Corporation has a clear shot at making it.

"You might have a Big 10 or a Big 20" in the industry by mid-decade, Mr. Stephen says.

Second- and third-tier companies will have to compete on something besides price. Some will target market niches.

Northgate Computer Company plans to avoid price wars by concentrating on such areas as network-ready computers.

CompuAdd, recently reorganized to prepare for price wars, aims to compete through its retail, corporate, and international sales channels. "We've been working on this for a year now. We think we're pretty well positioned for it," Mr. Hayden says.

PC prices may stabilize for the next three or four months, he adds. But "I don't think the price war is over by a long shot."