January 19, 1998
Mail-order vendors conspicuously absent from sub-$1,000 market
By Bob O'Donnell
Although the high-tech industry has no shortage of prognosticators willing to predict
what developments will be happening over the next few years, the truth is, major trends in
the computer industry often arise unexpectedly.
The most classic example, of course, is the spectacular rise of the Internet and the
wide-reaching impact that it has had on the entire computer industry. Many companies found
themselves unprepared for its rapid rise and were forced to scramble to fully incorporate
all aspects of the 'net into their plans.
Another surprising trend that's having a large impact on the computer industry is the
sudden appearance and sustained growth rates of the sub-$1,000 PC market. As I discussed
in last week's column,
sub-$1,000 PCs now account for as much as 40 percent of computer retail sales. Many major
vendors have scrambled to react to this development as well and, as a result, have
introduced a series of very impressive new machines in that price range.
Conspicuously absent from the vendors offering products, however, are some of the major
mail-order companies: Dell and Gateway 2000. (I was going to include Micron too, but just
found out at deadline that on Monday it is introducing the Millenia LXE SE 233: a $999
system with a 233 MHz Pentium MMX and 16 MB of EDO RAM, but no monitor.) I find this
particularly ironic because both of those companies built their names and their businesses
by offering high-quality, high-performance machines at low prices.
This situation essentially flips the entire economic model of buying PCs on its head.
For years, most of the best computer bargains have been available through the major
mail-order vendors. But today buyers can get some of the best computing values at retail.
From a business perspective, the trend is also surprising because the mail-order
vendors have typically been able to make changes to their product plans more rapidly than
those vendors that supply machines at retail. Also, the margins for the low-cost computers
are undoubtedly razor-thin, but again, it's traditionally been the mail-order companies
that have touted their ability to operate on small margins.
The reason these companies aren't participating in this market (at least, not yet) may
be due to their strong ties to Intel: It's widely known that Dell and Gateway are some of
Intel's biggest customers, often selling what basically amounts to entirely Intel-built
machines. Perhaps Intel's delayed reaction to the low-cost marketplace has forced them to
delay their own entries into this increasingly important segment of the market.
I have no doubt that these companies will eventually enter this market and offer their
own sub-$1,000 computers as Micron's new system clearly indicates. To maintain their
heritage of being less expensive than the systems sold through stores, they will have to
significantly beat those low-end prices. And, they, like other PC vendors, may be
wrestling with the question of how they can offer a compelling low-cost offering without
making major sacrifices on their more profitable, more expensive models.
In fact, a vast majority of users will likely find these sub-$1,000 machines adequate
for most of their purposes. The limitations that used to saddle most low-cost machines are
basically gone.
Consequently, I think many buyers will find it harder and harder to justify the
purchase of machines that cost two to three times as much, particularly when they only get
at most about one-and-a-half times the performance and features of these low-cost
machines. When people used to spend $1,700 for a "low-cost" machine and $2,500
for a more full-featured one, it made more economic sense to go ahead and buy the more
expensive machine. But now that a low-cost machine is $800 and a full-featured one is
$2,000 or more, I don't think the economics make as much sense.
The mail-order vendors have carved out an important space in the computer industry and
I have no doubt that they will continue to be major players. However, if they don't
provide a solid reaction and answer to the growing low-cost PC market, as Micron has now
done, I think they do risk slipping down from their current high-ranking status.
Uh, not that that's really a prediction of the future ... .
Copyright 1998, by InfoWorld Publishing Corp., a subsidiary of IDG Communications,
Inc. Reprinted from InfoWorld, 155 Bovet Road, San
Mateo, CA 94402. Further reproduction is prohibited.
