PC Makers Feeling Game

Computer companies hope to reverse slumping sales by appealing to hard-core gamers.
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Twenty-five years old and looking stodgy, the personal computer is turning to gaming to recapture its youth.

Last week,

Hewlett-Packard

(HPQ) - Get Report

formed a new gaming division within its PC business, spearheaded by

Voodoo PC

, a Canadian maker of high-end gaming PCs that H-P acquired. That move came on the heels of a similar marriage between

Dell

(DELL) - Get Report

and

Alienware

earlier this year.

And anyone attending the

Intel

(INTC) - Get Report

Developer Forum in San Francisco last week might have walked away thinking that PCs were machines built specifically to run video games.

Gaming isn't exactly a new phenomenon, but the PC industry's top players are only now starting to open their eyes to the potential of the gaming sector.

"I think what you're seeing over the last 18 months or so is a kind of realization that the market has shifted towards gaming being a very general part of entertainment for consumers and not a niche play," says Phil McKinney, chief technology officer of H-P's PC division.

Online games like

World of Warcraft

have become the new golf, contends McKinney. He says that venture capitalists are as likely to socialize and negotiate a term sheet in the virtual game world these days as they are on the fairway.

But it's clear that the PC's industry's sudden fondness for games has at least as much to do with the changing nature of the computer business.

PC sales this year are expected to decline 2.5%, roughly $5 billion, marking the first year of negative revenue growth since 2001, according to industry research firm Gartner. The culprit is increasing competition from consumer electronic devices and plummeting prices of PCs that look more like commodities than high-end equipment.

Notebooks once served as the premium, high-profit margin product for PC vendors, helping to offset the commodity desktops. But today, even a notebook can be had for as little as $449, leaving little room for profit.

Gaming PCs don't have that problem. Some of the gaming systems sold by Voodoo PC, for instance, start at $6,000 and include features like liquid cooling and a brushed aluminum chasis.

"It's beyond the difference between a Toyota and a Lexus," says Samir Bhavnani, director of research at market research firm Current Analysis. "It's the difference between a Toyota and a Ferrari."

And while there's little reason for the average Joe to upgrade a PC today, because any machine is essentially powerful enough to surf the Web and send email, the gaming sector operates on a different model, where more power is always better.

"These are customers who upgrade their systems frequently, they want the fastest processor, the most RAM, the best video card," says Bhavnani.

With a high-end line of gaming PCs, say H-P executives, the company will have a market outlet for technology developed in H-P's R&D labs. Many of these innovations would be too expensive to sell to mainstream consumers, but might find an audience among hard-core gamers willing to pay extra for the coolest new gizmo.

According to various industry estimates, the market for high-end gaming PCs is between $3 billion and $5 billion a year. That's not bad business to have for companies like H-P and Dell, particularly given the comparatively beefy profit margins.

Given that the overall worldwide PC market is a whopping $200 billion however, high-end gaming PCs still represent a niche.

But it's a very influential niche, whose value extends beyond the immediate revenue it generates.

Gamers represent ideal customers, since they serve an evangelical role, spreading the word to friends and family about the products and brands that have received their blessings.

By catering to gamers, PC companies can build a buzz for new products, creating a so-called halo effect that hopefully boosts sales across the entire company. It's word-of-mouth marketing at its best.

When Intel unveiled its new quad-core processor last week at its developer conference, it was no accident that the first version of a quad-core to be released in November will be the Extreme edition intended for enthusiasts and gamers.

CEO Paul Otellini told reporters at the conference that releasing the relatively limited number of quad-core Extreme processors first is very important to the high-end desktop market "where image is everything."

Intel is taking various steps to burnish its image among gamers. In November 2005, the company released the so-called Bad Axe, a high-end motherboard targeted to gamers with features like flame-shaped heat syncs, a redesigned and repositioned CPU socket, and increased customization capabilities.

Perhaps most significantly, Intel changed its stance on the practice of "overclocking" its microprocessors.

The gaming equivalent of tinkering with the engine of a hot-rod car, overclocking involves tweaking the settings of a chip so that it runs at faster clock speeds than the processor's official specifications.

Intel traditionally did not permit overclocking, and kept the settings for its Pentium processors locked. But according to Intel's Tim Takeuchi, who focuses on consumer strategy, the company now realizes that overclocking is a crucial issue to the gaming community.

When Intel released its first dual-core processors in mid-2005, the company quietly opened up the interface to overclocking, although it didn't publicize the fact. And with the Core 2 Duo, Intel's chips are now officially overclockable.

How much of a lift the PC industry will get by embracing gaming remains to be seen. But with the gaming phenomenon continuing to grow, PC companies don't want to be left out.