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PC Battle Card for Holiday Season 2005by Toni Duboise - Senior Analyst, Desktop PCs Just as consumers are settling in for the summer, dusting off beach towels, digging out sunscreen, and looking forward to an all-day snooze in the backyard hammock, PC manufacturers, like all industry players, are hunkering down to prepare their battle plans for the coming 2005 holiday season. As a precursor to the ensuing holiday shopping, Current Analysis is addressing key hot spots for the desktop PC market. The Power of Black Friday  Black Friday, however, does not come without cost. The already beleaguered margins for desktop computers were impacted by a reduction in overall desktop average selling prices, which dipped from $761 during the week ending November 20 to $629 during the week ending November 27. Despite the impact on profitability, store traffic-driving promotions are a necessary evil of doing business in retail. To that end, a repeat of such aggressive promotional tactics is expected for the 2005 PC holiday shopping season. Despite a slight boost in retail desktop average selling prices (from $685 in December 2004 to $699 in May 2005), retailers will likely break price barriers again this coming season. Based on pricing pressures from notebook alternatives, which continue to enhance their price/performance profile, and direct vendors like Dell, which has recently intensified its competitive efforts against retailers by offering clearance PC bundles at $299 price points, Current Analysis forecasts that major retailers will promote bundled PC packages from Tier 1 and Tier 2 players at an all-time low of $179 ($150 lower than the $329 threshold being advertised by retailers today). Additionally, PCs bundled with 15-inch LCD monitors are expected to take center stage with an estimated $499 promotional price ($100 lower than the $599 threshold being advertised by retailers today).
 This prediction relates directly to recent retail PC consumer buying habits, which reveal that performance is gaining on price as the key market driver for desktop PC purchases. Thanks in part to the performance requirements of the digital era, which requires more space and speed, and in part to vendors that incorporate bleeding-edge technology into standard mainstream configurations, like the eMachines T6212 with double-layer/dual-format DVD burner and Athlon 64 for $579, the $500 to $749 price class has been able to retain a considerable lead over the ultimate value sub-$500 price class. (The $500 to $749 price class accounted for 52% of the desktops sold in April 2005 versus 20% for those selling for less than $500.)  With the unrelenting performance requirements of digital media and continued improvements in mainstream desktop price/performance equations, Current Analysis views this as a sustainable trend and forecasts only a slight decline in this year’s retail desktop ASPs, from $685 in January 2005 to an estimated $665 in December 2005. Media Center PCs on the Rise Yet another factor supporting desktop ASPs is found in the Media Center PC segment, which continues to gain momentum at higher price points. In March and April of this year, one out of every ten desktops purchased in retail were desktop form factor Media Center PCs. In addition, Media Center PCs accounted for over 75% of the retail desktops purchased for $1,000 or more.  This noteworthy advancement can be attributed to the fact that, although desktop Media Center PCs still command a higher price than traditional desktop PCs, they have reduced in price considerably. Overall ASPs for desktop form factor Media Center PCs have declined over $350 from $1,426 in April 2004 to $1,058 in April 2005. In fact, Media Center PCs have increased their potential audience considerably with 27% of the retail desktop shelf presence and current mainstream retail price points starting as low as $749 (Gateway’s 812GM at Circuit City). Current Analysis’ holiday 2005 expectations for desktop Media Centers include new mainstream configurations priced between $600 and $749. Vendors may opt to offer a tuner-upgradeable option in order to achieve the lower price points, but Current Analysis does not view TV functionality as a requirement for Media Center success. As exhibited by the success of tuner-upgradeable pioneers, Media Center OS’s ability to commingle all digital media into a centralized GUI (Graphical User Interface) warrants its own audience. With lower price points and further technical advancements from its expected update in the second half 2005, Media Center PCs stand a good chance of becoming the darlings of the PC holiday shopping season this year. Forthcoming Innovation Unlike the past two PC holiday shopping seasons, which have delivered very little innovation beyond predictable speed and feed enhancements, the 2005 season is expected to provide some interesting advancements in technology and chassis styles.  With regard to chassis styles, small form factor PCs are expected to make some noise this season. Sparked by Apple’s novel Mac mini release earlier this year, minuet PC boxes have become a hot spot for the PC industry. In fact, Intel has gone from “Concept Entertainment PC” three weeks ago to working prototype. The Mac mini knockoff was manufactured by Taiwan PC maker A-Open at Intel’s request. Equipped with pricey Pentium M processors and Microsoft Windows OS, Intel’s mini PC will have difficulty hitting the same low price points offered by the Mac mini. At $499 and $599, Apple’s two Mac minis will most likely lead the small form factor PC market, which is expected to garner some play at holiday time. With consumers’ increased performance requirements, however, the small form factor movement is expected to have difficulty sustaining itself beyond fad status. In the forefront of the technological advancements are dual-core processor options and high-definition optical drive advancements. Both are expected to carry hefty newer technology premiums, which will relegate them to niche plays. Still, there is no better time to introduce a high-priced ticket item than during the holiday season, when consumers are most generous with discretionary spending. Facing an Uphill Battle  Despite the fact that there is a growing number of devices, such as photo printers and digital music devices, aimed at bypassing the computer altogether, the vast majority of consumers continue to view the computer as a digital hub necessary for the central storage, manipulation and production of digital media. While this trend will most likely hold true for the foreseeable future, desktop manufacturers will have to pull out all stops with regard to competitive promotion, value pricing, placement and product innovation in order to match the competition and secure their share of holiday spoils. |
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Best Buy took a decisive step toward eliminating mail-in rebates last week by promoting four select desktop bundles, including desktops by Gateway, eMachines, HP and Sony, with an atypical $150 instant savings. There were inventory limitations on the entry-level $399 PC bundle by eMachines, which is a clever way to drive store traffic without giving away the store. 
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