Pricing pressures squeeze profits on PCs

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Worldwide personal computer shipments are poised to grow 12.7 per cent in 2005, but industry revenues are expected to increase by a mere 0.5 per cent, according to a preliminary report on Monday from market research group Gartner.

The study highlights the competitive pricing pressure that has squeezed the largest PC makers, causing industry leader Dell and smaller rival Gateway to issue tepid financial forecasts in recent weeks.

Gartner said computer makers had been forced to push desktop PC pricing down to new levels in the struggle to wring growth out of a mature market.

The report also said prices for notebook PCs, which
generate higher margins than desktop machines, were dropping more quickly than anticipated. George Shiffler, a Gartner analyst, said the quest for growth was forcing vendors to test the limits of PC price elasticity, a dynamic compounded by the fact that buyers have increasingly come to expect sharp price declines.

In the US, Dell sells an entry-level desktop PC for as little as $299, while Hewlett-Packard’s lowest priced offering is advertised at $249.

PC vendors have been buoyed by strong demand for portable computers, which are now more affordable for corporate and retail customers. Gartner said worldwide mobile PC units were forecast to grow 31 per cent in 2005.

However, the report echoed previous warnings about the speed at which portable PC prices would decline. “The drop in mobile PC ASP [average selling price] has been particularly remarkable,” said Mikako Kitagawa, a Gartner analyst.

The research group warned that price pressures was likely only to intensify if unit growth slowed.

Gateway, the third-largest US PC maker, last week cut its sales forecast to reflect “competitive pricing pressure” among rivals. Only days earlier Dell said it had missed its quarterly revenue target because it had priced its PCs too aggressively.

Dell also rattled investors by issuing a forecast for the current quarter that fell short of analysts’ expectations. Hewlett-Packard, the second largest PC maker, last week reported better than expected results as it decided not to reduce prices as sharply as competitors.

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