Today’s Consumer PC Market: You Get What You Pay For, and Then Some

By Toni Duboise
Senior Analyst, Desktop Computing
April 10, 2006

In what some pundits view as an against-all-odds feat, retail desktops are hot—or at the least lukewarm when compared directly to their notebook counterparts. Despite the widespread move to mobility, evidenced by a mammoth increase of notebook sales in both commercial and consumer market segments, retail desktop PCs continue to post impressive year-over-year growth rates. The retail desktop market has posted double-digit annual unit growth figures for five months in a row since November 2005. This unforeseen resurgence of a category pronounced dead back in 2004 is attributable to several factors, but value and digital media attributes lead the pack.

Retail Promotions Set the Stage

To set the stage, retail PC players have engaged in spare-no-expense tactics with regard to promotion. With a steady panel of participants filling market development fund (MDF) coffers to back their own initiatives—such as Intel for its newly released Viiv platform and Microsoft for its prized Media Center OS—retail PC advertisements are working like a well-oiled machine in getting consumers off the couch and into the store to up their holdings in computer gear. As illustrated in the chart below, the number of desktop systems advertised in free-standing inserts (FSIs) has retained a healthy post-holiday average of over 80 systems per month. The Q1 2006 effort, which is more robust than that of the past two years (11% higher than 2005 and 54% higher than 2004), is a textbook case of promotional effectiveness taught in Marketing 101.

Value PC Segment Sets New Baseline: The $199 PC and $299 Bundled PC

In accordance with Marketing 101, loss leaders play a central role in the computer industry’s advertising schema. Q1 desktop advertisements are no exception, as all of the major players submitted to a new $299 desktop bundle baseline. Dell initiated the non-clearance $299 desktop bundle promotion in the second half of 2005. To the chagrin of the direct-sales giant, which has experienced difficulty hitting revenue goals since its $299 loss leader introduction, the supposedly short-lived promotion caught on with customers. The $299 bundled PC made sporadic appearances in retail and direct PC channels throughout the back-to-school and holiday seasons. Today, the $299 bundled PC price point is a mainstay of FSIs distributed by most of the major players.

During the week of March 19, Best Buy and Dell both staked a $299 value PC bundle in their weekly FSIs. Circuit City called and raised their promotional bets with a $279 value PC bundle from retail newcomer Acer. CompUSA simply called the bet with a standalone desktop advertisement of $199, a new baseline for PC-only promotions.

Today’s average value desktop PC bundle offers a modest configuration of an AMD Sempron or Intel Celeron processor, 256 megabytes of RAM, 100 gigabytes of hard drive capacity, a combo DVD/CD-RW drive, Microsoft Windows XP Home OS and a 17-inch CRT. The contemporary promoted bundled price of $299 is $50 less than comparable promotions a year ago.

As for non-bundled purchases, conventional standalone value PCs have also declined an average of $50, from a non-promotional $449 ASP in March 2005 to $399 in March 2006. While rare, there are standalone PCs selling for as little as $328.

Consumer PC Buyers Set Their Sights Higher

The aforementioned value PC configuration will suffice for basic PC applications such as Internet access, e-mail and word processing. However, with the proliferation of digital media—whether audio, photo, video or other—the vast majority of PC buyers require a higher level of PC functionality, which is the genesis for the escalation in price classes above the newly established sub-$400 market segment.

While the nascent sub-$400 market has increased from a blip on the radar a year ago to a 10% share of U.S. retail desktop sales in Q1 2006, the $400-$499 and $700-$799 price classes—with respective annual growth rates of 75% and 88%—are the motivating forces behind recent desktop market gains. Further investigation finds that in addition to elevated functionality, these two leading market segments offer today’s consumers an irresistible value proposition.

Mainstream PC Segment Reaches Sub-$500 Milestone

With 26% market share in Q1 2006, the $400-$499 price class has taken the lead from last year’s mainstream favorite, the $500-$599 price class, which claimed 28% market share in Q1 2005. As the newly crowned mainstream price class, the $400-$499 desktops pack an impressive arsenal of component features that include 64-bit processor options, a 512-Megabyte memory base, 160 gigabytes or more of hard drive space and a full-function rewritable DVD drive.

In the year-over-year comparison of mainstream PC promotions—such as those provided below—the 2006 system advantages are clearly evident in both function and price. The side-by-side evaluation includes a $439 bundled PC promotion dated March 19, 2006 and a $649 bundled PC promotion dated March 21, 2005.

At a promoted price of $439, the 2006 Compaq’s $210 price advantage over the $649-priced 2005 Compaq is clearly evident, but what’s under the hood matters, too. The 64-bit CPU, double hard drive and rewritable DVD components are performance wins not to be taken lightly. In fact, they all speak to the heart of the digital media PC buyer, who has learned that 64-bit CPUs equate to better performance than 32-bit CPUs, you can never have too much storage space when dealing with digital media, and rewritable DVD drives provide the ultimate flexibility. The fact that you can get all that for $210 less than last year may lead to buyers’ remorse for some, but it is clearly a call to action for others.

Enhanced PC Segment Packs a Performance Punch

With 14% market share in Q1 2006, the $700-$799 price class is tied for third place with its $600-$699 cousin. It is not the ranking, however, that makes this segment important; rather, it is the 57% annual growth rate it posted over Q1 2005. Like the new $400-$499 mainstream segment, the $700-$799 category success boils down to immense improvements in value. Loaded with leading-edge components such as dual-core processors, a 1-gigabyte memory baseline and 200 gigabytes or more of hard drive space, the enhanced desktop category is even more tailored for the digital medial PC buyer than the mainstream units.

In addition to a feature set that is superior to those of mainstream computers, these enhanced desktops also come equipped with Microsoft’s Windows XP Media Center operating system, which plays well to the digital media-minded PC buyer (PCs running Microsoft’s Windows XP Media Center OS now dominate the market, accounting for approximately 60% of desktops sold in U.S. retail).

In the year-over-year comparison of enhanced PC promotions, such as those provided below, the 2006 system’s advantages are clearly evident in both function and price.

In the case of the enhanced side-by-side comparison, the $899-priced 2006 system exhibits an imposing $300 price advantage over the $1,199-priced 2005 system. The accompanying performance upgrades are even more impressive than with the preceding mainstream comparison: an extra CPU core (Intel’s Pentium D is a dual-core processor), double the memory, 90 Gigabytes more hard drive space, a supplementary DVD optical, Windows XP MCE and a 17-inch LCD (compared to last year’s 15-inch LCD). Although not quite top-of-the-line components (those are saved for the performance class), the feature sets in this category elevate today’s enhanced computer buyers to another plain and one can almost hear their elated rationale: “But, honey, look how much money I saved—and I got two cores for less than the price of one!”

Looking Ahead: What’s Next For Desktop PCs?

Beyond the continuous development of the digital PC age, which will continue to progress, one of the most compelling reasons to buy a desktop PC today can be found in the value proposition. The premise of a value proposition is to obtain more performance for less investment—or, more simply, to get more for less. Thanks to a steady stream of technology regeneration, the value proposition offered by PCs today has increased significantly over the past year, which is why it has become a key driver in today’s market.

There are not many industries that can maximize on value like the PC and the consumer electronics sectors. Unlike the automobile industry and related fields, where increased material and labor costs reflect a continual increase in product pricing, the electronics industry is generally known for its ability to produce components better, faster and, ultimately, cheaper. Even the reduction of a chip die size serves a dual purpose of boosting potential performance while simultaneously reducing building costs. These types of advancements, coupled with the rapid succession of technology, the latter of which allows top-end components to trickle down to the mid- and entry-level markets, gives PC and CE manufacturers the advantage when it comes to presenting an improved value proposition.

As shown in the value, mainstream and enhanced desktop segments, the value proposition has improved tremendously over the past year. The fact that a growing number of digital media PC users require better performance and bigger storage repositories also bodes well for a sustained resurgence for the desktop space. As long as desktops offer superior performance components, such as dual-core processors, more memory and more storage, they will stave off the domination of the notebook.

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