H-P and Dell Playing Lowball Poker With PC Prices
K.C. Swanson
07/08/03 - 09:56 AM EDT
As the back-to-school season gets under way,
H-P(HPQ Quote) and
Dell(DELL Quote) are already wheeling and dealing on PCs. In fact, hardware makers are practically giving away computers as consumers gear up for school.
That doesn't bode well for a second-half rebound in IT revenues, because it shows companies still see weak demand -- even though the heady stock market gains of the past few months suggest investors are far more optimistic.
Monday, H-P said it will offer up an entry-level PC with 128 megs of RAM, plus a printer and free shipping for $499. In rolling out the deal it matched prices with archrival Dell, which has been hawking its own $499 PC with 128 megs of RAM and a monitor (plus a free upgrade to 256 megs of memory and a flat panel monitor) for several months.
Meanwhile, last week Dell debuted its own entry in the back-to-school market, offering a PC with a flat panel monitor and a free memory upgrade to 256 megs of RAM for $698.
No one on Wall Street sounds remotely surprised by the bargain-basement deals. But that only shows that it's come to be the norm for computer companies to engage in tit-for-tat lowballing.
"Five hundred dollars -- that's getting to be the magic price point for a package now," shrugs Charlie Wolf, an analyst at Needham & Co. "It's getting to be that because no one has a reason to buy a PC. I don't know if they will buy these. It really depends on the economy. We've got to have a rebound [for sales to pick up], in my opinion."
The manifest lack of enthusiasm for the sales outlook for boxmakers stands in stark contrast to their stock prices, which have been on a tear. Dell and
Apple(AAPL Quote) hit 52-week highs on Monday, while H-P came close to besting the high it hit in June. Dell closed up $1.03, or 3.2%, to $33.08, while Apple gained 74 cents, or 3.9%, to $19.87 and H-P traded up 75 cents, or 3.5%, to $22.05.
Margins Favor Dell
Price jousting between market leaders Dell and H-P has been especially harsh over the past few quarters, with the two swapping places several times for the No. 1 spot in market share.
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.
"We've come out with a lot of synergies from the merger with Compaq, and we can pass the savings on to the consumer," says Mark Sanchez, H-P's vice president of consumer computing for North America. "The bottom line is that the consumer benefits from the fact that we have economies of scale from the folks we buy from."
He declined to comment on a comparison of the two companies' operating expenses.
It's worth noting some analysts have a more positive stake on H-P's hardware prospects. "I firmly believe H-P will be gaining share in Q3 and Q4 in the PC market, and doing quite well in back to school as well as enterprise," says Lehman's Dan Niles. "I don't see [the back-to-school promotion] as a big profits issue." Lehman has done recent banking for H-P.
The $499 deal is likely most useful in simply attracting potential customers to retail stores, he says, noting that the computer offered is a relatively bare-bones model. "It will get a lot of customers thinking, then maybe they'll get into stores and get upsold," says Niles.
