Woe Is H-P as Dell Cuts Prices on PCs

Only a day after Hewlett-Packard ( HPQ) admittedflubbing an attempted price war with rival Dell ( DELL), Dell decided toexploit the misstep by pushing through its own biground of price cuts.

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

The price cuts apply to both enterprise andconsumer PCs. For example, prices were reduced 6% onDell's Dimension brand of desktops, and 3% on Inspironnotebooks.

Dell's move came only a day after H-P admitted ithad cut prices too deeply on its own PCs -- belowDell's prices, at times -- in a backfired attempt tocompete. The move hurt H-P's revenues and dumped itscomputer division into the red. To fix matters, H-Pimplied on an earnings conference call Tuesday nightthat it would raise prices.

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

"It's really sort of amusing that it could occurtwo minutes after H-P admitted they didn't know whatthey were doing in the consumer channel," says analystCharlie 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 suchdiscounts because its business model is based ondirect sales, which reduces its costs and makes iteasier for Dell to be profitable on lower-pricedsales. The direct sales model also makes it easier forDell to push through immediate cost reductions; bycomparison, H-P makes most of its sales throughdealers, who carry some five to six weeks of productinventory.

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

Wolf owns shares in Dell but not H-P; Needhamhasn't done recent banking for either company.

For its part, Dell denies the latest round ofprice cuts had anything to do with problems at H-P."Whenever we can find efficiencies within ourbusiness, we'll take those efficiencies and pass themalong as savings for our customers," says spokespersonMike Maher.

Dell reported just last week that it had managedto compress already tight operating expenses to an eventighter 9.6% of revenue, down from 9.9% a year ago."That shows that we're continuing to become even moreefficient in how we do business," says Maher.

H-P's overall operating expenses amounted to 21.2%of revenue in its July quarter.

Meanwhile, H-P disputes that the price cuts are asdeep and broad as Dell says. "In our experience, thesetypes of promotions are headline-catchers, and inreality a limited number of products are actuallyreduced by that amount," says H-P spokesperson BrianHumphries.

He says H-P is "gaining momentum in the part ofthe market that is most interesting, notebooks -- thefastest-growing segment of the market and the mostprofitable."

In the most recent quarter, H-P said unitshipments of notebooks were up 54% from the prioryear, while Dell's notebook unit shipments grew 37%.

On Wednesday, Dell shares traded down 52 cents or1.6% to $32.30. H-P, slammed one day after an earningsdisappointment, was off $2.26, or 10.2%, to $19.85.

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