With U.S. corporate buyers stuck in cheapo mode, tech companies are shifting their focus to the splurge-prone American consumer.
Over the past year, boxmakers such as
have kicked off big moves into consumer electronics. With last week's comments that it's looking into flat-panel TVs,
signaled that it will likely join in.
The trend may be humbling for computing hot shots, but it offers a chance to boost profits in hardware lines that have languished amid incessant PC price wars. As it turns out, selling high-end televisions can be more lucrative than hawking yet another $500 PC.
Gateway Goes First
At the forefront of the shift is Gateway, now in the midst of remodeling its 190 folksy cow-themed PC stores into sleeker outlets that also sell pricey goods. As part of its plan to offer computers alongside a whole swath of gadgets, it's launched nearly 20 consumer electronics products under its own brand, including expensive plasma TVs and home theater systems.
The reason for the change boils down to profits. Gateway thinks it can notch gross profit levels of around 30% to 35% in consumer electronics, far above its 2003 goal for overall corporate margins of 16%. With its push into consumer gadgets, the company is hoping it can lift total profit levels 4 full percentage points by 2005.
Growth beckons, too: The plasma TV market is expected to grow from just over $900 million this year to $1.5 billion in 2004 and $4.9 billion by 2007, according to estimates from the Consumer Electronics Association. Though the growth is occurring from a low base, it's still notable at a time some analysts expect PC revenues to stay flat for 2003.
Gateway's goal is to increase its consumer electronics business from an estimated 25% of total sales this year to 40% by 2005.
For different reasons, the biggest boxmakers are following in Gateway's path.
H-P, which in August talked up its biggest-ever product rollout of digital cameras and consumer printers, would like to usher along sales in its imaging and printing line -- the company's biggest moneymaker. H-P reckons that it now draws 22% of total sales from consumers, counting PCs and printers. Dell, which has hinted it will branch out further into consumer electronics, is looking to diversify outside its core PC business. It already sells its own Axim-branded handheld devices, though the digital cameras and plasma TVs featured on its site are from outside vendors. (Tellingly, Dell doesn't yet consider consumer electronics important enough to grant them a separate icon on its Web site.)
Testing the Dell Model
The latest moves mean the ongoing fight for PC market share could spill over into a whole new arena. But since every player claims a different business M.O. and product focus, it's tough to predict how the moves could play out. Moreover, the same methods that work for selling cheap PCs may not translate to pricey consumer goods.
In other words, it's not a given that Dell can dominate in high-end consumer electronics the same way it has in computer hardware. Anyone considering plunking down $7,000 for a plasma TV might want to check it out first. "The consumer electronics buying experience is still a pretty tactile experience. A lot of people like to see and feel and touch before purchase and Dell doesn't give you that opportunity," points out Michelle Gutierrez, an analyst at SoundView Technology. Her firm hasn't done banking for either company.
Gateway says it's found that three-quarters of consumers who buy its goods online or over the phone have first gone to one of its stores to check out the products. Dell, of course, doesn't have any retail stores. Its only way to showcase goods is through 60-odd kiosks scattered in malls around the country.
But while Dell could theoretically find it harder to reach consumers in the beginning, customers might gravitate more toward online buying over time. After all, at first many were hesitant to buy PCs online.
Meanwhile, Dell's likely entry into the market could have the effect of undermining Gateway's margins.
"There's just one issue here: that Dell
could come in the market at much lower gross margins than Gateway's hoping to earn," says Charlie Wolf, an analyst at Needham & Co. "Gateway is
aiming for up to 30 points of gross margin on these consumer electronics; Dell's probably willing to sell for 15 to 20 points. So, immediately, if Gateway wants to compete with Dell they will have to price stuff like this at a lower gross margin for themselves."
the consumer electronics business is more crucial for Gateway," notes Wolf. "For Dell it's just, 'We'll throw it at the wall and see if it sticks.'" Wolf, who owns both stocks, rates Dell a buy and Gateway a hold. His company has no banking relationship with either Dell or Gateway.
In any case, others think there's room enough for both companies to compete in a market like fancy TVs. "I don't think Gateway and Dell are going to cannibalize each other. I think they'll have more of an effect on
," says Tom Edwards, senior industry analyst at The NPD Group.
Edwards predicts that the consumer electronics market will get a boost as greater competition brings down prices. But in the process, retail consumer electronics stores stand to lose share, even though they'll see growth in dollars and units. Indeed, Gateway has already "forced the issue" with plasma TVs, Edwards says. As recently as five years ago, the high-end sets retailed for around $15,000; now Gateway offers one model for less than $3,000.
There's no question that the boxmakers are seen as serious competitors in consumer electronics. This summer, Best Buy, recognizing the threat from Dell and others, staged a major relaunch of its Web site.