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From...
Vendors push PCs below $500
August 3, 1998
Web posted at: 2:00 PM EDT
by Jason Krause
(IDG) -- It wasn't very long ago that the sub-$1,000 personal computer set the PC industry on its ear and helped bring a new wave of consumers onto the Net. Now get ready for the inevitable next step -- the sub-$500 PC.
In recent weeks a number of small computer vendors have begun introducing Windows machines in that price range Ð and some of the prices even include the monitor. Other firms, notably a start-up called iDot, are using the Internet to cut distribution costs to the point where they can sell even high-powered PCs for as little as $700. All are relying on a new wave of off-brand microprocessors to cut prices.
So far, market analysts say, most of the buyers are not newbies with modest incomes, but experienced users looking for a second or third machine. It may be a while before the sub-$500 machines have enough horsepower to attract a broad audience. Yet history suggests that this new pricing wave will take hold eventually, and it's likely to have a big impact on the strategies of PC companies and vendors of low-cost "Internet appliances."
It's surprising how much you can already get for $500. A $499 system from NetRam in Irvine, Calif., for example, includes a 200MHz WinChip (from Integrated Device Technologies), 16MB RAM, a 1.7GB hard drive, a 33.6KBps modem and a monitor. The configuration is acceptable for running word processing, spreadsheet and other office-type applications, and is sufficient for Internet browsing.
The key to such super-cheap machines is a new generation of low-cost microprocessors. Both IDT and Cyrix, now owned by National Semiconductor, have developed chips that have the power of a low-end Pentium and manage to integrate a number of other functions, including sound, graphics and memory control, into the main processor, thus cutting overall system costs.
Intel is beginning to play more aggressively in the low end of the market, but it doesn't expect to see its chips in sub-$500 systems any time soon. Neither does Advanced Micro Devices, the distant number two to Intel in the PC processor market. But fierce competition among the second-tier processor vendors should continue to spur dramatic performance improvements for even the cheapest chips.
Meanwhile, the economic crisis in Asia, while damaging to computer manufacturers in general, has helped cut the price of many other pieces of the PC. Most disk drives, motherboards, monitors and other components are manufactured in Asia, and the collapse of many Asian currencies has made them far cheaper.
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"Our goal is to make money with single-digit margins," says Neil Bremner, executive VP of iDot Computers, which sells exclusively over the Net. "Cheap PCs will be the key to our success. Most of our traffic comes from people checking out our cheapest machines."
But cheap PCs are not just sales gimmicks to reel in reluctant consumers. Compaq recently said it enjoys its biggest profit margins on its cheapest machine, a wildly popular $899 computer. But as with almost all products, the Net is likely to keep margins on cheap PCs thin indeed.
It remains unknown whether the advent of the sub-$500 PC will have the same kind of market impact as the $1,000 PC, which nudged household PC penetration up to 50 percent in many areas of the country and became the standard price for a big segment of the market.
Although common sense suggests that many non-PC owners could be lured by lower prices, home users have traditionally demanded substantial processing power, partly out of fear of being left behind and partly because they want to use graphics-heavy games.
"There's been an inversion," says Steve Tobak, VP of corporate marketing at Cyrix, a CPU company in Richardson, Texas. "What's driving innovation is not high-end scientific computing, but what the consumer wants to get under the Christmas tree."
By definition, novice users are not in a position to get on the Net and seek out the best price. And new buyers are often slow to get online.
According to a May survey by ZD Market Intelligence, only 34 percent of those who have purchased PCs for $500 or less are on the Internet. At the other end of the spectrum, 79 percent of those who have paid $2,000 or more for their PCs are using them for Web access.
Right now, sub-$500 PCs are primarily purchased by experienced users who already own a system. Many in the industry still believe that easy-to-use Internet appliances that don't require navigating Windows and cost $200 or less Ð such as Microsoft's WebTV Ð are the keys that will open the Net to new users.
Still, the recent history of the PC business suggests that growth is likely to come at the low end of the market. As system vendors and chipmakers begin integrating 3D rendering engines, audio enhancements and other functions into the CPU or motherboard, a sub-$500 machine could become suitable for the vast majority of applications. And that could bring ubiquitous Net access a little closer to reality.