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Buyers' Market: How Low Can You Go?

Toronto Star Fast Forward section front for May 17, 2001

For the computer industry, spring is an interesting time of year. There's always a slump after the Christmas buying season passes, so no one really worries heavily about slightly slower sales in the first quarter of any year.

However, along with tulips and the greening of the countryside, the second quarter is traditionally the time that businesses and consumers begin replacing older systems with new models. And that brings us to the effect that the general downturn in the economy - particularly the high-tech sector this time around - is having on sales and prices.

To put the case in a nutshell, the spring of 2001 is a great time to buy. Prices have never been lower and what you get for what you spend has never offered more performance.

The first thing I noticed in my spring survey of systems and prices is that both the high end and low end are lower than they were a year ago. No, I'm not remarking on the fact that an 800 MHz system is less expensive today than it was a year ago. It's traditional for the price of any high-tech product to fall over its time in the market as newer, faster products arrive at the old top-end price.

Instead, I'm suggesting that the top-end price has fallen off dramatically.

For example, as recently as the fall, when Intel first released its Pentium 4 systems, it was possible to pay over $5,000 for one with a relatively modest component mix and prices over $4,000 were common. However, as you'll see below, it's possible this month to get a name brand PC with a 1.5 GHz Pentium 4 processor in it for under $3,000.

And, you don't have to be left working with a system that's considered too slow if that $3,000 neighbourhood is too pricey, either. Where we once considered systems under $1,500 to be woefully inadequate for most users, we now find perfectly adequate home and small business clerical systems for under $1,000.

Market Madness...

Before we delve into the details of what's available in the Greater Toronto Area this month, let's have a look at some market trends.

International Data Corp (ICD) Canada is the first of the national market analysts to release first quarter 2001 figures. According to company spokesperson, Carrie Wake, "...the lack of demand by Canadian consumers was particularly unsettling in 1Q 2001."

Commercial sales of PCs were actually up a bit over the first quarter of 2000, but consumer branded systems declined for the first time. Nevertheless, the entire market - including consumer products, commercial desktops and notebooks, and servers - was up over the same period last year.

With servers and notebooks out of the mix, IDC reports growth in the overall desktop market of 8.9 per cent. When we break that down a little, the reason for the concern becomes more obvious. The growth in the commercial desktop market was just over 22 per cent, but the consumer market declined by nearly nine per cent.

Dell was the leader, not only in desktop shipments (18.9 per cent of the market), but also in growth (47.1 per cent over the same period last year, in a flagging market, led IDC to call its growth "blistering").

Compaq was next with a 14.5 per cent share of the desktop market in the first quarter of 2001 (27.9 per cent growth over the same period last year).

IBM was third with 13.2 per cent.

According to IDC, "Of all the leading Canadian PC vendors, Hewlett-Packard felt the greatest chill from the slowdown in consumer PC buying." The company's fourth place seven per cent market share represented a 14.5 per cent decline in shipments (although IDC also points out that the company fared better in its commercial PC offerings).

Fifth place went to notebook supplier, Toshiba Canada, with 3.8 per cent of the overall market and number one ranking in the notebook segment (followed by Dell and IBM). Despite a change in the mix of notebook sales (nearly 30 per cent going to consumers in 2000), the overall notebook market growth was flat, barely rising above two per cent over the previous year.

Once we delve below the initial analysis, however, some interesting trends emerge. "Branded vendors were very aggressive in their pricing, especially to government purchasers in the first quarter," said IDC analyst John Stanisic, "to the point where the price differential between branded and 'white box' systems was almost non-existent." Stanisic suggests that component pricing has also played a large role in cutting prices with both processors and memory in an oversupply. "Some memory manufacturers are selling at below cost, just to clear their inventory," he said. The result is that the price cutting, with companies such as Dell, Compaq, and HP locked in what may as well be termed a price war, is especially deep at the high end.

"The traditional trend," said Stanisic, "is for price cuts to be higher at the low end so that vendors can clear inventory, but looking at the prices of systems introduced last October and comparing their prices at the beginning of May, we're seeing only three per cent cuts for Celeron-powered systems, but cuts from 25 to 45 per cent in the faster Pentium III- and Pentium 4-based products.

"Profit margins have always been razor-thin," Stanisic added, "but this year, a vendor typically makes less than four per cent on a sale."

There's one other factor that Stanisic feels is affecting the market. "The lower prices mean that more people are buying more robust systems with beefier component mixes. Vendors don't want to sell 4 GB hard drives, for example, because they can't make any money at that level, so they'll start with 10 GB models. Then we get into what is known as 'good enough computing,' where a consumer can't figure out why there is a need to upgrade. The system they own is good enough to run the software they use and, because they bought a more robust system to begin with and they know it's a headache to transfer data and re-install products, they're reluctant to get another system. It ends up extending the life cycle of their PC."

Lowest end

Based on a look at several products, not only from name brand suppliers, but also from two of the GTA's retail suppliers of "white box" generic systems (Throne Computers and Grey Tech), here's what you can look forward to in the under-$1,000 price range this spring.

With a few exceptions, Celeron-based systems dominate the low end. For example, Dell offers a 700 MHz Celeron-based Dimension L700cx for $799 with 64 MB of SDRAM, a 15-inch monitor, 20 GB hard drive, and 48X max CD-ROM. It lacks a sound card and speakers.

IBM offers a NetVista A20 (model 6270E2U) without a CD-ROM drive or monitor and with a 10 GB hard drive for $849. But you don't have to settle for a Celeron processor.

For example, Dell's Dimension L933r with 933 MHz Pentium III processor, 64 MB of SDRAM, 20 GB hard drive, 48x max CD-ROM (but no sound card or speakers) starts at $999.

Grey Tech offers a 750 MHz Pentium III system (Asus motherboard) with 64 MB of SDRAM, 10 GB hard drive, 15-inch Optiquest monitor, Sony 52X max CD-ROM drive, sound and speakers, and network interface card, for $939.

For a little bit more...

If we extend our sights just a bit and cap the price at $1,500, the choices we get increase.

For example, that puts us into a Hewlett Packard Pavilion 6745C with 700 MHz Celeron, 64 MB of SDRAM, 20 GB hard drive, HP CD-writer (4x / 4x/ 24x read / write / playback), sound and speakers, network interface card, 56K modem, and a lot of software, for $1,299 (no monitor included).

IBM has another NetVista A20 (6270H2U) with 733 MHz Celeron processor, 64 MB of SDRAM, 10 GB hard drive, and 48Xmax CD-ROM (but no modem or monitor) for $1,159.

Throne Computers offers four systems based on an Intel D815EPFV motherboard with 128 MB of SDRAM, 20 GB hard drive, 48X CD-ROM, sound and speakers,and NEC AS70, 17-inch monitor, ranging from $1,338 to $1,508 with Celerons at 667 and 766 MHz or Pentium III processors at 733 or 800 MHz.

Compaq's Presario 5008CA, with 800 MHz Duron processor, 128 MB of SDRAM, 40 GB hard drive, 8X CD-RW (rewriter), and 56K modem (but no monitor or sound system mentioned) has a list price of $1,199. Model 5010CA with all of the above, plus a network interface card and 48 X CD-ROM, as well as 900 MHz Duron (AMD's newest Duron) is $1,399 (again, no monitor and no mention of any sound system).

Nor do you have to settle for Compaq's Presario "home" brand. The company is also offering Deskpro models such as the EXS with 866 MHz Pentium III processor, 128 MB of SDRAM, 20 GB hard drive, 48X max CD-ROM drive, 56 K modem, network interface card (but no monitor) and also for $1,399. Dell is also in the up-to-$1,500 hunt with its Dimension 4100 starting at $1,299 with 64 MB of SDRAM, 933 MHz Pentium III processor, 15-inch monitor, 48X max CD-ROM, integrated audio, and 20 GB hard drive.

Mid-Range...

What can you get for just a little more? If we extend the ceiling to $2,500, your choices include all of the systems above, plus:

Dell's Dimension 8100 with 1.3 GHz Pentium 4 processor, 128 MB of Direct Rambus DRAM (DRDRAM), 20 GB hard drive, 17-inch monitor, 48X max CD-ROM drive, integrated sound (speakers extra), and network interface card for $1,999.

Compaq Deskpro EXS with 1 GHz Pentium III, 128 MB of SDRAM, 40 GB hard drive, "CD-ROM" drive, and Windows 2000 Pro for $2,099. HP Pavilion 7855 with 1 GHz Pentium III processor, 128 MB SDRAM, 60 GB hard drive, 12X max DVD-ROM drive and HP CD writer (8x / 4x / 32x), 56 K modem, network interface card and lots of software for $1,749

A Grey Tech system with 1.33 GHz AMD Athlon Mustang processor, 128 MB of DDR (double data rate) DRAM, 40 GB hard drive, Sony 52X CD-ROM drive, 56K modem, sound and speakers, and LG Electronics 19-inch monitor for $1,969. Or, a 1.5 GHz Pentium 4 system, with 128 MB of DRDRAM, 40 GB hard drive, 19-inch LGE monitor, 52X CD-ROM, 56 K modem, for $2,129.

A Throne system with 1 GHz Pentium III, based on Intel 815EPEA motherboard, 256 MB of SRAM, 16X max DVD drive, sound and speakers, Viewsonic PF790, 19-inch monitor, and 30 GB hard drive for $2,379.

And at the high end...

A fast survey of the priciest systems, those with Intel's 1.7 GHz Pentium 4 processor, shows that what used to be a $5,000 neighbourhood has moved downmarket.

For example:

Throne: starting at $3,309 (same as described just above but with 128 MB of DRDRAM).

Dell: Dimension 8100 at $3,107 with 20 GB hard drive, 128 MB of DRDRAM, 19-inch monitor.

HP: As of May 9, not advertising a 1.7 GHz system. However, their Pavilion 9880, with 1.5 GHz Pentium 4, 128 MB of DRDRAM, 80 GB hard drive, 16X max DVD and CD writer (8x / 4x / 32x), integrated sound and speakers, 56 K modem, and network interface card (but no monitor) had a list price of $3,899.

IBM: NetVista A60, $3,829, 256 MB DRDRAM, 60 GB hard drive, CD-RW (12x / 8x / 32x), (but no monitor, modem, or network interface).

Compaq: No 1.7 GHz models on the company's price list as of May 9. 1.4 GHz Deskpro "Internet price" listed at $2,319. No details available.

And last...

I can see prices continuing to fall over the next short while. Although Intel and AMD appear to have slowed the rate at which they've been releasing new processors (and driving the prices of older models down), both companies are locked in a struggle for the rapidly diminishing world market for PC sales (which only grew by 3 per cent over the past year, says IDC) and they'll continue, out of desperation if no other motivation, to beat each other bloody with lower prices.

So long as there is a glut of memory on the market, you can expect prices to stay low, but that may not last through the fall. Until what is known as a "killer app" comes along, software that demands higher processor performance, consumers will continue to follow the "good enough" mind set that reduces the pressure for faster and newer equipment. What it translates into on the bottom line is a world of hurt for manufacturers and retailers and a buyers' market for consumers.

Sidebar: WHY THE SUDDEN PRICE DROP?

For a number of reasons, personal computers always get cheaper over time. For instance, at some point during the production cycle for each component, economies or scale kick in and prices drop to their lowest possible point. Also newer and better technologies are constantly introduced to the marketplace, forcing the price of older ones down.

For the past two years we've seen a steady drop in the price of key components such as RAM, hard drives and CD-ROM drives, as well as peripherals such as CD burners, scanners and printers. This happened even as the technologies improved: RAM got faster (from PC66 to PC100 to PC133); hard drives got faster (5400 to 7200 rpm) and more capacious (10GB drives have been replaced by 20, 40 and even 60GB ones); CD-ROM speeds improved (from 24x to 52x and beyond); CD burners got faster (2x to 4x, 8x and now even 12x), and scanners and printers saw improved resolutions as prices plunged toward the zero mark.

The situation for processors – the heart and soul of a personal computer and always the component with the largest impact on prices – has always been a little different. Why? Largely because Intel has been so powerful for a decade and controlled the pace with which new processors were made and released, the older ones phased out.

From about 1990 to 1999, the processor market was roughly divided into about five tiers: fastest, 2nd, 3rd, 4th and 5th fastest. And although the processor names changed, the price for each tier remained about the same: about $1,300 down to about $100. Thus, when a 700 MHz Pentium III processor was the fastest kid on the block in 1999, it sold to retailers and systems assemblers in bulk for something like $1,150. So you could expect any system that used it to be quite expensive – in the $5,000 range. But as faster PIIIs came along and took over the top tier on the speed chain, the 700MHz chip was pushed into the second tier, and prices for it fell. And so on.

But things have changed in the last two years, and especially the last one. The first major reason is the entry of Advanced Micro Devices (AMD) into the marketplace as a serious competitor to Intel. The second is that since last year, demand for PCs has fallen.

"As a result," said Asger Falstrup, president of one of Canada's larger distributors, Ingram Micro, "there is a glut of PCs and components on the market," which means prices must fall. So, the processor price/speed chain has been altered.

For instance, when Intel released its 1.5GHz chip earlier this year, it was priced at about $900 U.S. in bulk (1,000 or more). But when Intel released its 1.7GHz chip last month, the price fell to $352 (US in lots of 1,000).

What does this mean to Canadian resellers? According to figures from IDC Canada, for example, a single unit of the fastest processor in November 1999 (boxed Pentium III, 733 MHz) sold to dealers for $1196.75. The fastest processor in November 2000 (boxed Penium III, 1 GHZ) was $822.69. Today's 1.7 GHz Pentium 4 sells to dealers for either $597.39 by itself or for about $970, but with the inclusion of 256 MB of Rambus DRAM.

This alone should lower the price of PCs considerably – especially in the higher end. And price drops in the higher end will reverberate through the rest of the market – why pay $1,400 for a system based on a 800MHz Celeron when you can get one based on a 1.7GHz Pentium for a few hundred dollars more?

But combine that with falling prices on most other components and peripherals (many memory manufacturers are selling below cost to clear inventory), a general decline in the economy and stock market at large and especially in the tech sector, and a glut of PCs on the market, and you've got a recipe for a price war.

Contacting me