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Consumer PC demand is back, but at what price?

Source: Reuters - Fri 7th Aug 2009

A gradual bounce back in consumer demand is helping keep the struggling personal computer market afloat, but plunging prices and a shift toward cheaper machines will keep up the pressure on profits.

Globally, consumers are coming back to PCs, but they are doing so at prices as much as one-fifth lower than even a year ago, analysts say.

Hewlett-Packard, Dell and rivals Acer and Lenovo have slugged it out to keep sales up and safeguard or take market share: a battle that of late has been waged by aggressive pricing, analysts say.

Pacific Crest Securities analyst Brent Bracelin noted PC prices have fallen for years, but the decline accelerated with the introduction of no-frills netbooks. He said PC makers have plenty of experience managing costs to maintain margins.

"There's always going to be pressure" he said. "The question is how well do you manage the supply chain and try to reduce costs at the same pace as the price decline or faster."

The global PC market is still limping along, with second-quarter shipments falling 5 percent from a year ago, according to Gartner. But that result was better than expected, and Gartner said the continued growth of low-cost laptops was a driving factor.

But many investors are optimistic about a recovery in consumer electronics spending in the second half, as the launch of Windows 7, a potential improvement in the economy, and a host of new products in the pipeline help pry open consumers' wallets.

Even with a recession and surging unemployment, consumers increasingly view a PC as a must-have, according to analysts. With new, lower prices and the migration of life and commerce to the Internet, the PC has become indispensable. 

"Consumer demand is definitely coming in better than anyone would have thought six months ago" said Avi Cohen, managing partner of Avian Securities.


Shoppers may also be opting for PCs because they understand their value in a difficult economy, said Barry Jaruzelski, a partner at consulting firm Booz & Co.

"I wouldn't be surprised if PCs are turning out to be more robust because of a bit of a substitution effect. People are forgoing a new Blu-ray or getting a new flat-panel TV and buying a new PC" he said.

Consumer spending on PCs has been buoying the tech sector lately. Chip bellwether Intel said this month better-than-expected consumer demand helped it post results and outlook above Wall Street's forecasts.

Shares in the three biggest PC players Dell, HP and Acer have surged more than 50 percent since touching lows in February and March, as investors bet on a spending recovery.

But signs of falling PC prices abound. Wal-Mart is selling a Compaq Presario notebook it developed with HP for $298. A similar unit used to sell at Wal-Mart for $548.

Many expect average PC selling prices to keep heading south as new, inexpensive models flood the market and corporate spending on higher-cost PCs stays depressed in the near term, though the impact on PC makers' margins remains uncertain.

According to researchers NPD, the average selling price of PCs sold at U.S. retail in June tumbled more than 18 percent from a year ago to $701 (416 pounds) . For a Windows PC the average price was $515, for a Mac it was $1,400. 

Gartner estimates global PC industry average prices fell 14 percent in the second quarter. Consumer PCs typically make up just less than half of global unit sales, it said.

Apple Inc , which sells more expensive PCs, saw solid consumer PC demand as Mac unit sales rose 4 percent in the June quarter. But selling prices also declined and Mac segment revenue fell 8 percent.

Dell forecast lower gross margins in the July quarter due in part to price competition and a mix shift to more consumer PCs. At its annual analyst meeting, Chief Financial Officer Brian Gladden said the company's PC business, which is around 60 percent of its revenue, faces some challenges.

"When you look at the projected market dynamics that we face for this business, we see relatively strong unit growth projections at 10 percent plus, but you see declining prices and margin pressure" he said.

But falling prices may actually encourage more shoppers to return as the industry heads into the pivotal back-to-school and holiday season, some argue.

"People realize that it's not so bad that they can't spend some money if it's good value, and a $350 to $400 laptop wouldn't be possible before but now it is" said Gartner analyst Mikako Kitagawa.

And signs are that equipment manufacturers are preparing for a "pretty big build" with the forthcoming launches of Windows 7 and new PCs featuring Intel's CULV chip, Avian's Cohen said. CULV promises longer battery life and good computing power at a relatively affordable cost.

"We won't know if it sells or not until next year, but they're still going to have to build it" he said.

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