May
1, 2000
PC
Prices: Going Up, but Why?
Twenty years
of boom times in the PC business have given new definitions to the concepts of
price and value and, for many of us, have changed the rules about what we think
things ought to cost. In
practically every other area—cars, for example—we readily accept that each
new generation of products will be a little better and therefore will cost a little
more. But with PCs, we've grown accustomed to a different equation: Each new
generation of PCs is better, sometimes much better, but costs less, not more,
than the previous generation. That's part
of the magic of PCs, isn't it? They're always supposed to cost less and
less.
Based on sales figures for the past several
months, that kind of New
Techno Math may be changing. And we may have to make some dramatic shifts in our thinking about PC
pricing. A recent
report by market researcher PC Data confirms a trend many of us have suspected.
For at least the past four months, typical PC retail prices have been going up,
not down. The month-to-month increases are not trivial. The
typical retail price for a Windows PC in January 2000 was $873. This is a 3.4
percent increase over December's $844.
How can this
be happening in the era of the $600 PC?
Part of the
answer lies in economics—not new-fangled Web-era, turn-the-tables economics
but some very old economic principles, involving the interplay among supply,
demand, component costs, and competition. And part of the answer lies in the
kind of technology that consumers decided they want to buy.
First, the
economics: Simply put, as more manufacturers have dropped out of mainstream
retail PC marketing, Dell, Compaq, Hewlett-Packard, and e-Machines have come to
dominate the retail PC marketplace. That's a shorter list than previously. IBM
is the most obvious missing-in-action player, having pulled its Aptiva line from
retail distribution late last year; one-time high-flier Packard Bell is gone,
too—so the remaining suppliers feel less competitive-pricing pressure.
The
components PC makers use have been getting more costly and some have been
in short supply. CPUs, memory chips, LCDs—all have been thin on the ground and
more costly than they were six months or a year ago. Intel, for example, was
unable last year to meet its orders for chips at both the high end (Pentium III)
and low end (Celeron) of its product line. CPUs are the most expensive component
of low-price PCs; shortages mean manufacturers have to go to the spot market,
paying more and buying in much smaller lots than usual. PC pricing at
retail reflects these higher costs, so PC sales at retail overall have
slipped— by almost 8 percent, from last January to this January.
Combine these
economic factors—fewer people buying fewer PCs from fewer manufacturers, which
face higher component costs—and you have a classic old-economics prescription
for price increases.
Consumers are
playing a part, too. Although truly inexpensive, sub-$600 machines from
e-Machines
continue to attract buyers, they are getting a far smaller market share than a
year ago, when consumers were falling in love with these amazingly inexpensive
machines. Fifty-five percent of all PCs sold at retail in January were priced
from $600 to $1,000; the sub-$600s drew only 23 percent of the retail market.
Consumers are
also getting
more demanding about the PCs they buy and the generic econo-boxes are
proving less interesting. New, faster CPUs from AMD and Intel, a wider
understanding of the need for more memory to get good performance out of
Windows, and the appeal of truly big hard disks are all contributing to
increasing PC prices.
None of these
factors are likely to change much over the next few months. Intel
says it tried to catch up with orders in the first quarter, which ended March
31. Even though memory prices are dropping again, and the inflationary effects on the
memory-chip market of last year's Taiwan earthquake are fading, the history
of the memory market suggests there will be continuing instability in prices.
Don't expect
to see PC prices shooting up sharply this year. But we'll see steadily higher
prices, month to month and quarter to quarter. The idea that the latest and
greatest will always be cheaper and cheaper may be a fond memory, an artifact of
another era. And waiting to
buy because you're sure it will cost less next month is no longer a very smart
PC-buying strategy—if it ever was.
