Upstart eMachines Goes Up Against the PC Powerhouses

The maker of dirt-cheap PCs has bitten off market share. Now it's large enough to draw the ire of heavyweight rivals.
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eMachines

, meet the big boys. (By the way, they don't like you.)

Earlier this year, upstart companies such as eMachines,

Microworkz.com

,

Enchilada

and

Free-PC

, which offer very low-priced or free PCs, were heralded as the wave of the very near future. While some of these upstarts may succeed in the end, the old PC veterans are showing they can still play ball.

No company is butting heads harder with the industry's Goliaths than eMachines, an overnight sensation in the U.S. thanks to low prices, two generous Korean owners and wafer-thin gross margins. The company began offering PCs for $600 and under, and then for practically nothing in June if customers signed up for a three-year Internet-service provider deal with

America Online's

(AOL)

CompuServe

unit. Now eMachines is the No. 3 player in the U.S. retail market with an 11% market share, according to

PC Data

, and it has just hit 1 million units sold.

Thanks to its success, there's talk in Silicon Valley that eMachines is reportedly about to go

public this fall in an IPO backed by

Credit Suisse First Boston

. But eMachines has the habit of annoying its better-known competitors, which could delay or postpone its IPO. Normally, the company and its bankers are required to be quiet in this stage, and its bankers didn't even come near the phone on this deal.

Jointly owned by

Korea Data Systems

and Korea's

Trigem Computer

, eMachines is currently advertising an iMac-clone PC, called the

eOne

, in television and print ads. The machine, says one lawyer, could inspire

Apple

(AAPL) - Get Report

-- who already is suing Korea's

Future Power

in a similar trademark suit -- to come after eMachines.

Donna Weinstein, a principal at the law firm of

Fish & Richardson

, says she was stunned when she read eMachines' rationale for its new product.

"An eMachines spokesperson said in the paper that it was hoping to trade off Apple's brand name. If I was their lawyer, I would have died when I read that," says Weinstein, who practices trademark litigation. She says it gives Apple a chance to charge eMachines with willful infringement. Apple did not return calls seeking comment.

"What could be more troubling to eMachines is if Apple seeks an injunction on the product," says Mark Specker, a

Soundview Technology Group

PC analyst. Computers usually lose 1% of their value per week, so "God forbid if eMachines, with its small profit margins, has to keep its stuff on the shelf." Specker rates Apple a buy, and his firm has no underwriting relationship with the company. An eMachines spokeswoman declined to comment, saying the company is in a quiet period.

'We're very anxious to push the H-P brand right next to eMachines'.' -- Larry Sennett, an H-P spokesman

The launch of eMachines' PC-based iMac lookalike comes just weeks after

Compaq

(CPQ)

sued eMachines for 13 cases of patent infringement. The case, which will take place in a U.S. District Court in Texas, will probably take months, if not years, and could cost eMachines up to $10 million, estimates Jim Pooley, a tech-patent attorney with

Gray Carey Ware & Freidenrich

in Palo Alto, Calif. An attorney for Compaq says eMachines has yet to respond to its complaints.

The PC Pie
PC retail sales in the U.S. based on market share

Source: PC Data, monthly numbers from June 1999

Hewlett-Packard

(HWP)

, currently the top-selling PC company in U.S. retailing, has virtually copied eMachines' low-end business model. The PC- and enterprise-computing company now sells computers at $700 and $800, but also offers a $400 rebate if customers sign up to CompuServe for three years. Compaq recently put a similar deal in place at retail stores, just months after eMachines instituted the rebate through AOL in June.

But not everyone is enamored with eMachines' business tact.

Soundview's Specker argues that the real goal of these larger PC sellers is not to co-opt eMachines, but to consume it. "H-P is co-opting eMachines' strategy to crowd them out of the picture," Specker says.

H-P and Compaq are hoping that, during the Christmas season, consumers will pick PCs with brand names rather than eMachines if price isn't a big factor. "We're very anxious to push the H-P brand right next to eMachines'," says Larry Sennett, an H-P spokesman.

By then, eMachines, bolstered by its cash infusion from the IPO, may come up with another trick to torment the established players.