H-P and Dell Playing Lowball Poker With PC Prices

As the back-to-school season gets under way, H-P(HPQ) and Dell(DELL) 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) 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.