January 13, 1999 Web posted at: 12:52 p.m. EDT (1252 GMT) by Ephraim Schwartz

From...

LAS VEGAS (IDG) -- The biggest story of the consumer electronics show here last week did not happen on the show floor or at one of the hundreds of press conferences announcing new products.

Instead, computer history of a kind was taking place in a penthouse suite on the 29th floor of the Riviera Hotel where some of the largest American retailers, such as Sears and Tandy, were lining up along with Ingram Micro, the world's largest distributor of high-technology products, and America Online, the world's largest online service, to meet with Stephen A. Dukker, the president and CEO of a PC start-up company called eMachines that sells a $399 computer.

It seems Dukker just may have cracked open a huge segment of the buying public that heretofore has been left out and these computer resellers want in.

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With home purchases of PCs among upper-income families almost at the saturation point, growth is now no more than about four percent per year, according to the International Data Corp. And the computer industry has been licking its lips in anticipation of finding the magic number to attract millions of lower-income families.

Just last week when Intel introduced faster versions of its low-cost Celeron chip, one Intel executive candidly admitted that to date low-cost PCs have not attracted a new buying segment of lower-income households.

"We have found that the same families who bought a $1,500 PC for the home are now buying a second PC for about $1,000," said Paul Otellini, executive vice president of the Intel Architecture Business Group, in Santa Clara, Calif.

However, these are not new PC buyers, but rather the same families, now able to spend fewer dollars to get an additional system

"We are still looking for that magic number, the holy grail that will bring in new buyers," Otellini said.

The reason for the crowd of computer resellers on the 29th floor may not be because eMachines has sold out of its first production run of almost 200,000 systems, but because of what the responses from warranty guards sent in after the purchase are indicating, according to Dukker.

Exactly 53 percent of those responded are in households that make less than $50,000.

Almost as startling, is the fact that 33 percent of sales were generated not by advertising but by word of mouth.

Dukker agrees with Otellini that there is a magic number and he believes eMachines has found it.

"We may need to refine those numbers a little bit more, but we are just about there," Dukker said.

So while the eMachines sales force is busily lining up new resellers to go along with Best Buy, Office Depot, CostCo, Staples, Frys, and others that sold the first round of systems, Dukker is busily planning the next round of eMachine's low-cost products.

The company will be upgrading its current $399 offering with an AMD K6-II processor running at 300-MHz, with 512KB of cache, a 2.1GB hard drive, 32MB of RAM, a 24-speed CD-ROM drive, a 56Kbps V.90 modem, Windows 98, speakers, and 4MB of video RAM. The systems will ship early in February.

For $499, eMachines will sell an Intel 333-MHz Celeron system with the same configuration except for a larger 4.3GB hard drive. The Intel systems will ship by the end of this month.

Later in the second quarter eMachines will attempt to out-price yet another seller of low-priced systems when the company introduces an iMac-like, all-in-one system that will sell for somewhere between $699 and $799. Currently, the iMac is selling for about $1,100.

The eStation will include a built-in 15-inch monitor, a Celeron 366-MHz or 400-MHz chip, a 4.3GB hard drive, 32MB of RAM, a 24-speed CD-ROM drive, 2 PC Card slots, Universal Serial Bus ports on the front of the system, and -- to attract business buyers -- a 10/100-bast-T Ethernet connection.

When President Bill Clinton announced last week that the American economy is in the midst of the longest continuous growth in its history, 91 months, he said that, "a rising tide raises all ships."

Perhaps what CEO Dukker might say is a lowering tide of prices raises more buyers.

InfoWorld Editor at Large Ephraim Schwartz is based in San Francisco.