A Price War Breaks Out in PC Industry : Technology: Many models are 30% cheaper than four months ago. The object is to generate sales.


The continuing recession, heightened competition and fundamental shifts in customer buying patterns have spurred a personal computer price war that analysts say is unprecedented.

PC prices have fallen a whopping 30% since the beginning of the year, according to some estimates. And more discounting, perhaps as much as another 20%, is on the horizon, industry insiders said this week.

“This is the most aggressive price war we’ve ever seen in the PC industry,” said Bruce Lupatkin, a technology analyst with Hambrecht & Quist in San Francisco. “It’s great for consumers.”


The aim of these price cuts is to spur sales and reach customers who have been put off by premium pricing. The moves come against a backdrop of slowing PC sales.

Last year, PC sales increased 7.3%, compared to a 28% increase in 1987, reports Dataquest, a Silicon Valley research firm. And since the beginning of the year, sales have fallen below 1990 levels, say officials from ComputerLand and Businessland, the nation’s two largest computer retail chains.

The latest cuts came Tuesday when Compaq Computer Corp. said it was slashing PC prices by up to 34% and would drop prices on optional equipment, including memory storage units and modems, by as much as 68%. Industry giant International Business Machines is expected to follow suit shortly. Apple Computer late last year introduced a new line of low-cost Macintosh machines that have become its hottest-selling product.

These moves underscore not only the severity of the ongoing recession, analysts and industry sources say. More important, they underscore customers’ increasing demand for lower-cost computers made by second-tier “clone” manufacturers and the gradual erosion of customer loyalty to such established brand names as IBM, Compaq and Apple.

“The PC is a commodity now, just like anything else. And it’s being bought that way by businesses,” said an executive of Businessland. “A lot of businesses are ordering through their purchasing departments, not through the engineer-types in data processing. That means these things are being bought just like pencils. And when that happens, you know price becomes the prime consideration.”

The case of American Home Foods illustrates this shift. The food-processing giant once depended on Compaq personal computers to track the supermarket comings and goings of its Chef Boy-ar-dee, Jiffy Pop and other brands. No more.


Now it is a loyal customer of AST Research, an upstart PC clone maker in Irvine whose desktop machines have traditionally been about half the price of Compaq’s. “We finally said, ‘Hey, no way! We won’t pay,’ ” explained Larry Michael, the company’s computer systems director.

Although some manufacturers still believe that the latest price war was spurred by the recession, many analysts argue that it is the result of the increasing acceptance of second-tier manufacturers and a growing realization that there are few truly important differences among the hundreds of various PC models.

“There’s less technology differentiation in the products than ever before,” said David Everett, senior vice president for marketing and sales at Wyse Technology, a San Jose PC clone maker. “So pricing and other non-technology issues become premium.”

In addition, analysts say, a whole new flood of cut-rate marketers and offshore PC manufacturers have combined to drive prices down. The force these new players are exerting on the market, said Douglass Kass, a Dataquest analyst, is greater than before. And, he argues, brand-name manufacturers are feeling the heat.

Douglas Johns, Compaq’s vice president of worldwide corporate marketing, acknowledged that Compaq is trying to win back customers put off by the company’s traditional pricing, considered among the highest in the PC industry.

“We know from our customers--and those who are no longer our customers--that affordability was our biggest problem,” Johns said. “We know that if we want to grow our business, we have to do it by lowering our prices.”


However, Johns said, the company is not responding directly to its competitors. “This action has been one that’s been developed over a long period of time,” Johns said. “This is not a reaction to any set of second-tier companies.”

Analysts said that as the top three manufacturers drop their prices, the second-tier companies will feel increasing pressure to follow suit.

But Tom Yuen, marketing vice president and co-founder of AST, says his company has no plans to drop prices immediately.

“We’re gratified that Compaq had finally realized that they have been gouging their customers,” Yuen said. “But we’ve known all along that there are only so many users who are willing to pay big bucks for glamour and image in their PC.”


Personal computer sales in February, 1991 (in units sold through computer dealers, which account for about 40% of total sales) IBM: 28.6% Compaq: 18.4% Apple: 17% NEC: 6.1% AST: 4.5% Epson: 4.1% Toshiba: 3.4% Others: 17.9%

Source: Dataquest