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Woe Is H-P as Dell Cuts Prices on PCs

Only a day after Hewlett-Packard (HPQ - Get Report) admitted flubbing an attempted price war with rival Dell (DELL - Get Report), Dell decided to exploit the misstep by pushing through its own big round of price cuts.

The Round Rock, Texas-based computer hardware maker announced price reductions of as much as 22% across its computer line, beginning today.

The price cuts apply to both enterprise and consumer PCs. For example, prices were reduced 6% on Dell's Dimension brand of desktops, and 3% on Inspiron notebooks.

Dell's move came only a day after H-P admitted it had cut prices too deeply on its own PCs -- below Dell's prices, at times -- in a backfired attempt to compete. The move hurt H-P's revenues and dumped its computer division into the red. To fix matters, H-P implied on an earnings conference call Tuesday night that it would raise prices.

That makes Dell's next-day price cuts look all the more like a deliberately timed tactical response.

"It's really sort of amusing that it could occur two minutes after H-P admitted they didn't know what they were doing in the consumer channel," says analyst Charlie Wolf of Needham & Co. "H-P adjusted prices, meaning they pushed them up, and now Dell goes down with its own prices ."

Unlike H-P, Dell can afford to offer such discounts because its business model is based on direct sales, which reduces its costs and makes it easier for Dell to be profitable on lower-priced sales. The direct sales model also makes it easier for Dell to push through immediate cost reductions; by comparison, H-P makes most of its sales through dealers, who carry some five to six weeks of product inventory.

In the long run, Wolf calls today's round of price cuts "incrementally positive" for Dell. "They're out to weaken H-P any way they can," he says. "One thing to remember is that the price sensitivity of consumers and others is enormously high, so you could have modest price declines leading to rapid share shift between brands that are essentially identical, running on Windows and Intel."

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