H-P and Dell Playing Lowball Poker With PC Prices

In the first quarter Dell claimed the lead with 16.9% of share to H-P's 15.6%, according to Gartner.

With its latest $499 offer, H-P is clearly making a bid to gain back some share.

But some analysts wonder whether H-P can afford to embark on a race to the bottom. "The problem with H-P is that their costs are higher than Dell's," points out Christopher Whalen of Ramberg Whalen, a boutique research firm.

Dell managed to cinch up its costs even tighter in the most recent quarter, compressing operating expenses as a percentage of revenue to a record low of 9.8%, down from 9.9% a year ago. (Operating expenses here are defined as selling general and administrative costs plus R&D.)

H-P's operating expenses stood at about double that level, at 20.8% in the first quarter.

"So how can H-P go for that $500 box?" asks Whalen. "I don't know. When H-P tells analysts it wants to compete in low-end PCs and servers, I don't think anyone in the analyst community knows why."

Executives at H-P insist it's possible to profitably grow share in the PC market. The company has managed to pull its computer arm out of the red, posting two consecutive quarters of profits -- barely. For the quarter ending in April, H-P wrung a hair-thin $21 million operating profit out of $5.1 billion in revenue in its PC division.

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