The current retail trend toward low-cost desktop computers is looking more like it will have a negative effect on third-quarter revenue growth at both PC manufacturers and chipmakers. The market for PCs priced around $1,000 – or segment zero as it is known – fueled strong unit sales at OEMs such as Compaq Computer Corp, Hewlett-Packard Co and Packard Bell NEC Inc. In August, unit sales of desktops beat last year’s figures by 36% and July shipments by 10%, according to a report by PC Data Inc. Prices of $800 to $1,000 on a couple of Presario models helped give Compaq 37% of the retail market in August – a 50% market increase and an 80% increase in shipments from July. But this unit growth isn’t all good considering that three of the top five selling PCs in the month sold for under $1,000 – accounting for 25% of units but only 17% of revenue. PC Data offers the sobering news that current landscape shows the decline in average unit price is outpacing overall unit growth, which spells bad news for revenue. Average selling price ($1,425) was 18% lower than last August and 6% lower than July. This trend obviously has a direct implication on the semiconductor sector, as well. Analysts at Deutsche Morgan Grenfell point to a slowdown for Intel Corp towards the end of the third quarter, echoing concerns at Merrill Lynch that Intel’s product mix is leaning toward the low end, hurting profit margins (CI No 3,258). DMG is confident in Intel’s near term prospects for recovery, though, and feels that current market conditions will have no effect on Intel’s will to accelerate the shift to Pentium II. The fact that the corporate market isn’t looking at low-end machines and the introduction of Microsoft Corp’s Windows 98 operating system should both help absorption of the more powerful Pentium IIs. DMG also points out that Intel can ride the segment zero wave without too much trouble by simply using old 0.35m fabs to churn out Pentiums for the cheap boxes. As long as the volumes of older chips don’t get too large percentage-wise, things in Santa Clara should stay sunny.
