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Chips Likely to Bring Down PC Prices

June 03, 2002|CAROLINE HUMER | REUTERS

Personal computers, which any savvy shopper can pick up on the Internet for as little as $600, may shortly become even cheaper.

Intel Corp. and Advanced Micro Devices Inc. slashed prices on microprocessors, making it possible for PC makers to cut prices and potentially spur demand in the doggedly weak PC market.

"Historically, that's why PC prices have dropped every year--[PC manufacturers] passing those component prices through and hopefully maintaining gross margin," said Barry Jaruzelski, a managing partner in the global technology practice at Booz Allen & Hamilton Inc. in New York.

PC prices fell in 2001 amid a price war led by Dell Computer Corp., which used its direct-sales business model to gain market share and maintain profit while its competitors booked losses trying to keep up.

Demand from corporations and consumers weakened in 2001 because of the economic and technology spending decline and as PC buyers began replacing computers less frequently.

As Dell cut prices, Hewlett-Packard Co. and Gateway Inc. tried to keep up, lowering prices in an effort to retain market share and spur overall demand.

This year, prices have remained low, although research firm Gartner Dataquest said prices increased slightly in the first quarter from the fourth quarter, when companies cut prices to jump-start holiday sales.

But demand for PCs is off from the end of last year. HP said recently that consumer demand dropped off as its fiscal second quarter ended April 30.

As a result of continued weak demand, the Intel cuts and stable pricing of other components such as memory, lower PC prices are likely, analysts agreed. And the first company they said will take advantage of the cuts is Dell, which has low inventories and a direct line to its customers.

"The way [Dell] benefits is that they have less inventory," said Bear Stearns analyst Andrew Neff. "If I cut the price today, I'm going to get your business because I'm going to be going up against somebody else at a higher price."

On the other hand, competitors such as HP that use distributors and sell their PCs to consumers through computer stores have weeks of inventories of PCs built with more expensive chips that they need to sell.

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