User Frenzy : PC Price War Has Sparked a Holiday Rush of Customers

For more than a decade, David Kouris was able to resist the personal computer revolution.

But in a year in which PC prices have fallen 35% to 40% on average, the sales manager from Mission Viejo is ready to take the plunge.

“The prices pushed me into the market,” said Kouris, 34, who was considering plunking down $2,300 for his first machine at the Computer City Supercenter in Garden Grove. “I’m a novice. But I’m starting to feel like a computer is going to be a necessity, and I have some catching up to do.”

Happily for personal computer manufacturers, lots of customers like Kouris appear to be prowling for a PC this holiday season. The reason: the lower prices, new models aimed at first-time buyers, expanded sales channels and renewed consumer confidence, analysts say.

Sales are so strong that Apple Computer, Compaq Computer and IBM cannot build their most popular models fast enough. With a good fourth quarter, PC sales in 1992 could rise 10% above last year, up from an earlier estimate of 6% growth for the year, says market researcher International Data Corp. in Framingham, Mass.

Yet the PC-buying public is also growing pickier. Low prices alone won’t bring them into the stores. Consumers want machines that are easier to set up and use, and they’re also demanding no-cost, on-site repairs, more technical help and some free software. And perhaps most important for the long-term structure of the industry, they also want the security of a brand name--provided they don’t have to pay for it.

“If the prices keep coming down, I’d get an IBM,” said David Korb, 37, an Irvine salesman who says the ease-of-use offered by Microsoft’s Windows software--which uses graphic symbols to make computers easier to use--has helped him overcome his fear of computers. “I know that they’ll be around, at least for a while.”

It was the belated decision by big-name manufacturers--especially Compaq and IBM--to compete far more aggressively on price that set off the current PC buying frenzy. After years of watching clone-makers such as Dell Computer, Gateway, Compuadd and Northgate eat away at their market by offering equivalent machines for as little as half the price, Compaq and IBM hit back this summer with massive price cuts and new models.

The sales results have been spectacular. Compaq, the Houston-based company that appeared to be in a free-fall a year ago, has returned to profitability under Chairman Eckhard Pfeiffer--though margins are razor thin. IBM has reversed a long slide in market share. And Apple, based in Cupertino, Calif., is enjoying strong sales of its notebook computers and new, consumer-oriented versions of the Macintosh.

“If anything is different this year, it’s that the first-tier companies are leading the price cuts, and they have eliminated the price advantage the clones once had,” said Nathan Morton, president of CompUSA, a Dallas-based retailer with 38 computer stores. “They are focusing on consumers, and that has brought more first-time buyers into the market.”

The flip side, logically enough, has been carnage among smaller suppliers of IBM-compatible computers. Magnavox, KLH, Librex, Tandon and dozens of other companies have abandoned all or parts of the PC market this year.

Traditional computer dealers are also facing pressure now that more and more PCs are being sold through consumer electronics chains, department stores, warehouse clubs and computer super stores.

Computer makers favor the non-traditional outlets because they believe that they offer a more congenial environment for first-time PC buyers. Sales at computer super stores are expected to soar 67% this year, compared to 8% growth for traditional computer dealers. PCs sold through mail order and mass merchants should be up 16%, according to BIS Strategic Decisions, a market researcher in Norwell, Mass.

But warehouse chains and computer super stores are not for everybody. Kazuo Takeda, 33, a Fullerton engineer who is looking for his sixth personal computer, is an example of a finicky buyer who won’t be lured by spiffy promotions and brand names alone.

“I don’t think the mass-merchandise stores give you the best deal,” he said. “I want service, someone I can talk to if something goes wrong, and good components.” Takeda plans to buy a PC from a small dealer he has known for years.

The conflicting demands of novices such as Kouris and sophisticated shoppers such as Takeda has led manufacturers to develop elaborate, multiple-brand marketing strategies. Compaq now has the Deskpro M, Deskpro I, Prolinea and Contura lines, for example, while IBM has the PS/1, the PS/2 and Valuepoint. In most cases, the difference among the product lines is where they are sold and what special accessories and expansion options are included.

Indeed, PC hardware is now largely a standard commodity. The biggest technical choices a customer needs to make are how powerful a microprocessor he or she wants and the amount of data storage capacity--decisions that will largely dictate the price of the system. After that, it’s a question of how much software, service and other extras the manufacturer and dealer are willing to provide.

Compaq, for example, now offers a three-year warranty on its machines--a big improvement over the one-year warranty that has long been commonplace in the industry. Most manufacturers also include software with their consumer systems, though the value and quantity of that software varies widely.

A crucial question for consumers and suppliers alike is whether the current price war will continue. Many industry executives believe that price-cutting will moderate over the next six months as manufacturers struggle to fill orders and figure out how to make money in what has suddenly become a very low-margin business.

“The price war is probably largely behind us,” Apple Chairman John Sculley said at a recent industry conference. “The branded companies are doing well enough that there isn’t a great need for them to slug it out (on price).”

Brian Clark, an analyst at International Data, expects prices for the least-expensive PCs to continuing dropping, to about $500 by late 1993, from about $800 now. Overall price declines should ease from the whopping 35% to 40% this year to about 15% or 20% next year.

But a new price war could erupt at the top end of the PC market, Clark warned, if Advanced Micro Devices delivers on its promise to introduce a chip that mimics Intel Corp.’s powerful 486 microprocessor without infringing on Intel’s patents.

Falling Prices

The “street prices” for one of the most widely used personal computers have fallen rapidly during the past two years. A PC powered by the 386SX chip is considered the minimum required to run Microsoft’s popular Windows software.