This article was originally published in Maclean's Magazine on May 11, 1998
PC Prices Falling
There is no magic involved, but business is booming at Voodoo Computer Studio. In the computer store's lobby in Calgary, boxed monitors are piled high against the wall, ready to be delivered to what company president Rahul Sood says is a record number of customers. Like others in the PC industry, Sood has seen demand for home computers soar in recent months. Sales this year are nearly triple what they were a year ago, with the result that Voodoo is now planning a three-storey addition to its current building, increasing its display space to 270 square metres from 110. "People," says Sood with a smile, "are just computer-crazy right now."
Small wonder, considering that personal computers have never been so cheap. In the old days - which, in the constantly accelerating time line of the computer industry, means about a year ago - a PC buyer had to spend anywhere from $3,000 to $4,000 to get an above-average system fast enough to run the latest software applications. Today, the same computer - or, in many cases, an even more powerful one - can cost half as much or less. Welcome to the world of the sub-$1,000 PC (by the miracle of exchange rates, it's more like the sub-$1,500 PC in Canada), long thought to be the threshold below which computers would become true mass-market items.
According to PC Data Inc., a Reston, Va.-based market research firm, so-called segment-zero PCs, the industry term for computers costing less than $1,000 (U.S.), comprised less than one-fifth of total U.S. computer sales last year. In March, the figure hovered around 50 per cent. The cheap-PC trend is shaking up every part of the industry, from giants such as Intel Corp. of Santa Clara, Calif. - which produces about 90 per cent of the world's microprocessor chips - to individual retailers.
Computer software makers and parts suppliers are gearing prices down, too. In March, Corel Corp. of Ottawa cut prices on its WordPerfect office suites by as much as 50 per cent. Similarly, ATI Technologies Inc. of Thornhill, Ont. - one of the world's largest suppliers of video adapters - announced a low-cost graphics board specifically engineered for the entry-level PC market. "Fundamentally, we love the sub-$1,000 PC market," says Henry Quan, ATI's vice-president of corporate marketing. "It's increasing the total available size of the PC market, and it's going to allow us to sell more graphics adapters."
PC price cuts are nothing new, of course. The computer industry is founded on the principle that microprocessor speeds will double every 18 months, and that as companies such as Intel introduce new and faster hardware, older systems will lose their value. Until recently, buying a cheap PC usually meant buying an obsolete one, or settling for a clone based on cut-rate or even pirated components. These days, however, inexpensive machines are available even from highly regarded brand names in the office-equipment business: Compaq, Hewlett-Packard, IBM and Dell among them. While not equipped with cutting-edge technology, a typical budget system today features a 200 MHz or faster processor, a 24-speed CD-ROM drive, a minimum of two gigabytes of hard drive space and a fast modem - good enough to meet the needs of most home computer users.
The rapid decline in PC prices, analysts say, is due in part to weak PC sales worldwide last year and slowing demand in financially troubled Southeast Asia. Another important factor is software. Since at least the release of Microsoft's Windows 95, which required a Pentium-class chip to function well, there have been few popular programs that demand more powerful and more expensive processors - most software titles run just fine on the new cheaper systems. On top of that, the popularity of the Internet - now with 100 million users worldwide - is helping to offset the technological trend towards ever-increasing computer power: a fast processor like Intel's recent Pentium II is not nearly so important to most Web surfers as the speed of their modems. "The industry has tried to convince people that 'you need a Pentium II, you need this or that,' but let's be honest," says Mark Bell, associate publisher of Monitor Magazine, an Ontario computer monthly. "How many people are running high-end graphic processing suites, or multiple pages of spreadsheets? They do word processing, e-mail, surf the Web, play a few games - and they don't need much processing power for that."
The idea of a "good-enough" computer may sound innocuous, but it has sent shock waves through the computer industry. And while major manufacturers have scrambled to meet consumer demand, low PC prices have hurt their bottom lines. Last month, Compaq Corp., the world's largest personal-computer maker, reported a 96-per-cent drop in first-quarter profits to $23 million compared with a year earlier - a result, in part, of recent price cuts. Intel - now in a neck-and-neck battle with Advanced Micro Devices Inc. of Sunnyvale, Calif., which supplies the processors in about half of all sub-$1,000 PCs - reported first-quarter profits of $205 billion, down by 27 per cent. Over the next six months, the company plans to eliminate 3,000 jobs from a workforce of 68,000.
The significance of the cheap-PC trend can be seen in the changes it has spurred at Intel, which for more than two decades has been pushing the technology envelope with ever-faster processors. Last month, the company unveiled its first processor specifically designed for the sub-$1,000 market: the Celeron, a modified version of the Pentium II, without the more expensive chip's super-speedy cache memory, but fast enough, Intel claims, to meet the needs of many users. Douglas Cooper, Intel's marketing manager for Canada, says the Celeron is an attempt to break the pattern of so-called trickle-down pricing - taking last year's technology and marketing it at the low end this year. "That works fine if you're looking at a price drop from $4,000 to $2,500, but what became obvious last year was that at $1,499, you can't do that," says Cooper. "You need to design a microprocessor for that price point."
The Celeron, which Intel will ship to PC makers at about $215 per chip (compared with more than $1,140 for its recently released 400 MHz Pentium IIs), is a response to the bifurcation of the market, Cooper adds. "The idea of two separate brands is that if you consider yourself to be a consumer with a performance bent, then the Pentium II processor is the right choice," he says. "But if you just know you need a computer and are really kind of dabbling, then systems based on the Celeron processor will give you the best combination of performance and affordability."
In part, the double-streaming of Intel's product line is an attempt to protect its high-performance chips from price erosion. But some observers are skeptical that the gambit will work. Steve Baker, senior hardware analyst for PC Data, says manufacturers are finding it increasingly difficult to coax consumers into buying high-end systems, currently priced at about $4,000 in Canada. "Sure, it's great to have those speedy things," says Baker, "but the fact is that customers are voting with their feet." As a result, he says, the "good enough" PC is putting pressure on the prices of all computers. "What the low-end PC is doing," Baker adds, "is not just building the low end, but destroying the high end."
Many analysts expect further cuts as the industry gravitates towards so-called network computers - stripped down machines designed specifically for use over the Internet or a local-area network - and inexpensive set-top boxes that allow people to surf the World Wide Web using their televisions. For consumers weary of an industry that has a reputation for promoting the next big (and expensive) thing, that is welcome news indeed.
Maclean's May 11, 1998