Computer Price Wars

Hewlett Packard, Dell, and Compaq seem to be in a fight to the death to grab the top computer maker spot

 May 14 - 20, 2001

If you have been considering purchasing a computer, now might be a good time to take the plunge. Major cuts in CPU prices and memory have dropped the overall prices. Also, computer companies have stated that sales have been dropping steadily due to a slowing economy and are doing all they can to increase sales. Layoffs, cost cutting, and restructuring are being used all across the industry. Hewlett Packard, Dell, and Compaq seem to be in a fight to the death to grab the top computer maker spot.

In corporate sales, Compaq and HP (Hewlett-Packard) have been lagging far behind Dell in sales and prices. They say that is all about to change as they rev up the fight to compete with Dell. Last week Dell announced a 10 per cent cut on Dell corporate desktops. Following that, HP dropped their prices by up to 28 per cent, and Compaq dropped up to 31 per cent. Dell has established itself as the leader on price, said Chris Murphy, a senior analyst with IDC. "Dell has been more aggressive (on price) than most of the other guys throughout this year," he said. "What we've seen this week is more of an evening out" of prices, Murphy said. "These guys are catching up with Dell." Corporate prices are not always set in stone. Most PC makers will use additional discounts for larger orders, and add on support and other perks to lure new customers. The price cuts stem from two areas, said Dave Zabrowski, HP's vice president and general manager of business PCs for North America. "Component prices continue to fall at a fairly rapid pace," he said. "It's our intention to continue to be competitive with our offerings."

Meanwhile, Compaq cut prices by up to 31 per cent on DeskPro EN PCs and 20 per cent on DeskPro EX PCs, the company said. Compaq also combined its consumer and corporate PC businesses in an effort to cut costs. Lower costs resulting from the reorganization helped the company reduce PC prices, said Steve Telaroli, North American business product manager for desktops in the company's new Access Business Group. "It's that plus passing on component cost reductions direct from suppliers," Telaroli said. But competitive pressures do enter into the pricing game. "We have to be able to maintain a position out there in the marketplace," Telaroli said. Thanks to reductions in component prices, IDC's Murphy believes that Dell will be able to cut prices again soon. The other PC makers will likely follow. "I wouldn't be entirely surprised to see Dell cut prices again, but it will probably not be within the next week or so," he said. "I think Dell can sustain a price cut of 7 to 10 per cent, but it's not likely they could do it again for another three to four weeks," he said.

On the consumer front, top personal computer makers Compaq and Dell are locking horns in a fierce battle for sales. "It's not a question of whether there's going to be a price war, we're in a price war,'' said Compaq Chairman Michael Capellas, whose company lost the No. 1 personal computer maker position to Dell during the first quarter. "The price war will continue,'' Capellas said at the Merrill Lynch Hardware Technology conference. "We will be as aggressive as anyone.'' Compaq's rival Dell will be merciless in managing costs and will consider more layoffs, a senior Dell executive said, as it keeps the heat on in a price war to seize market share. "We will be ruthless in how we address our cost structure going forward,'' said Tom Meredith, Dell's senior vice president of business development and strategy. Meredith pointed to cost controls and aggressive pricing as reasons Dell was able to take market share from Compaq. Asked if layoffs could be part of that ruthless cost-cutting, Meredith said simply, "Absolutely.'' Adding to the fray is the fact that the top two microprocessor companies, Intel and Advanced Micro Devices Inc., are engaged in their own price wars.

Wall Street is not necessarily happy about the wars. "We remain concerned about Dell's continued price aggression and we lack confidence that the PC industry's sacrifice of short-term profitability will lead to long-term gains,'' UBS Warburg Analyst Don Young said as he cut the rating on the stock to buy from strong buy. "We are also hearing more about further streamlining and expense reductions at Dell confirming our belief that Dell is continuing to prepare for a drawn-out price war,'' he said. Dell's stock fell $1.80, or nearly 7 per cent, to $24.93 on Nasdaq, where it was one of the most active issues. Compaq dropped 55 cents, or 3 per cent, to $17.40 on the New York Stock Exchange. Since late September, shares of Dell have lost 20 per cent of their value, while shares of Compaq have lost 43 per cent. "Compaq is trying to differentiate itself with richer solutions and richer services, which is true. Dell is saying we can sell you cheaper boxes, and that's true,'' said Merrill Lynch analyst Steven Fortuna. "So there are pieces that overlap between Dell and Compaq, and that's in about two thirds of Compaq's business,'' Fortuna said. "In that two-thirds of the business, Compaq and Dell are slugging it out.'' Capellas said that the product lines where Compaq was cutting prices included industry-standard servers, certain storage products, and major corporate accounts. He said price cuts would keep pressure on profit margins. ''When pricing gets tough, margins don't get better,'' he said. Capellas said he has yet to see signs of a recovery from the soft consumer demand that has crippled PC makers. "The consumer business is going to continue to remain weak,'' Capellas said. "We have not seen that step up.''