H-P and Dell Playing Lowball Poker With PC Prices

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.