Network: Pile 'em deep, sell 'em cheap

Buy a PC, any PC, and a faster, cheaper one will be on the shelves within months. Competition, better production processes and cheaper, faster components mean that computers become less expensive year by year.

But, recently, there has been a dramatic shift in PC prices, especially from the big names. A well-specified, branded PC now costs less than last year's anonymous clone.

The price of a reasonable multimedia PC is now below the magic pounds 1,000 barrier. Leaf though the computer magazines and you'll find adverts for computers which are - just - under pounds 500. This is not top-of-the-range hardware: a high-specification computer based around Intel's latest 350 or 400Mhz Pentium II chips still costs closer to pounds 2,000. Even so, today's entry-level PC is a capable enough machine that should cope perfectly well with programs such as Microsoft Office, or using the Internet. Even tasks like desktop publishing, once the preserve of "high-end" systems, are feasible on a low-cost computer.

Price cuts in the computer business tend to follow a pattern. A new computer, usually based around a new chip, comes out. Its high price means it appeals mostly to professionals - in areas like multimedia production or software development - and enthusiasts. Prices then drop so the machine becomes mainstream and, in as little as 18 months, it is an entry-level system.

A computer offered at a very keen price may be an obsolete model that has not sold well, and which manufacturers need to clear from their warehouses. In general, though, retail prices for PCs are being driven down by three factors: cheaper components, competition between manufacturers and a new sort of computer - the "Basic PC".

As a result of the price-cutting, the computer industry is now facing a squeeze: IDC, an industry analyst, predicts computer sales in Europe will grow by 14 per cent - the same figure as last year - but revenues will fall from 8.5 per cent to 4.1 per cent.

Stiff competition is forcing down prices, and the consequences are already making themselves felt. The US maker AST has pulled out of the desktop computer market; the Dutch firm Tulip has filed for protection against its creditors; Germany's Siemens Nixdorf has sold its manufacturing plant to Acer.

Lower component prices help manufacturers to keep costs down, but the economies of scale favour the global brands. Cheaper chips, especially microprocessors, cheaper memory and larger, cheaper hard drives account for part of the price cuts. The rest, though, is a squeeze on computer makers' margins and this could cause more casualties over the next few months.

"The PC business is moving more and more towards volume and the big vendors have been very aggressive on price," says Thomas Reuner, PC analyst with DataQuest.

The weapon in the large manufacturers' armouries is the basic PC. This is a no-frills computer with a low price, but with the security of buying from a well-known company. The basic PC lets customers buy a branded PC at clone prices, albeit with compromises.

Basic PCs use cheaper parts, especially microprocessors. They are built either around older chips, or Intel's new, low-cost Celeron processors. Celeron chips are not as powerful as a Pentium II, but they are cheaper. A 266Mhz Celeron, for example, is slightly slower than a 233Mhz Pentium II. There are other compromises: a basic PC will have its sound card, and maybe its video card, on the motherboard. This makes upgrading harder. Not everyone believes the basic PC is a good choice. Chris Bakolas, technical director of Dan Technology, says that price wars harm the industry and cheap machines do buyers few favours. "Requirements for computers are being raised," he says. "Software becomes bigger, better and more demanding. And the limitations which come with [basic PC] systems are going to affect home users more than businesses."

Manufacturers say that the demand for basic PCs is coming from large businesses, but low advertised prices are having the inevitable effect of forcing down costs in the home and small office business, too. Buyers of basic PCs are concentrated in two categories: businesses, which buy them in volume for undemanding tasks such as word-processing, and home or Soho (small office/home office) users who are testing the PC waters and want to keep to a tight budget.

"Price cuts have been most aggressive in the small-to-medium enterprise market," explains Steve Torbe, desktop marketing manager at Compaq. "A lot of consumers are buying a PC that, ideally, they may want to upgrade, so they buy a high-spec unit. A business PC is not always as feature packed."

From this week, Compaq will sell its lowest-price Deskpro PC for pounds 705, exclusive of a monitor and VAT. With a 266Mhz Pentium II and 32Mb of memory, it is a capable machine. Hewlett Packard believes its prices will start in the same range. "The current price will fluctuate, but a price of between pounds 700 and pounds 800 will stay," predicts Dave Thompson, HP's UK marketing manager.

HP's lower pricing, Thompson says, is a result of lower component prices but also a more efficient supply chain. Larger companies have been watching and learning from the activities of the mail order vendors such as Gateway and, especially, Dell. "The direct manufacturers don't buy [components] any cheaper than we do," Thompson says. "If you can take costs out of the supply chain, you can achieve the same prices as direct vendors."

Whether price cuts are good for the industry, and for consumers, remains to be seen. Overall, home PC prices have not fallen as fast: the average home user still spends around pounds 1,500 on a computer, and often buys it through a store, where retailers' margins add to costs. Then, only one in four households has a computer, so there is room for growth. Not everyone needs an ultra-fast machine with added software and multimedia or game-playing accessories.

The basic PC has its limitations. Businesses budget to replace their computers every two or three years. So it matters less if the machine will not run newer versions of software. A home user planning to keep a computer for, say, five years, might be ill-advised to buy a basic PC.

Ultimately, price cuts may mean fewer computer manufacturers than there are now. And smaller firms will find it hard to compete with the marketing and buying might of the global computer companies. So it may be a case of less cost now, less choice later.

Five systems for around pounds 1,000

COMPAQ PRESARIO 2254 pounds 899 inc VAT

A basic model from one of the biggest names. It comes with a 56K modem, 3.2Mb hard disk and 32Mb RAM. It has a full multimedia kit, including a 32-speed CD-Rom drive, a 3D graphics card and speakers. To keep costs down, the Presario uses a 233Mhz AMD K6 chip instead of an Intel processor, and memory expansion is limited, but the price is keen.

DAN TECHNOLOGY XPLORA II Plus

pounds 1,069 inc VAT

This is not Dan's entry level machine, but its entry-level Pentium II system. It has a 266Mhz chip with 512K cash, 32Mb RAM, a 4Gb hard disk, modem, speakers and CD-Rom drive, plenty of expansion and a 15in monitor. In all, a good value, powerful system. Dan's cheapest PC is an AMD-based 233Mhz machine, at pounds 937 inc VAT.

GATEWAY G6 233

pounds 938.82 inc VAT

Gateway's basic box uses a 233Mhz Pentium II chip, with 32Mb RAM, 2Gb hard disk, 32-speed CD-Rom drive and a 15in monitor. There are also decent sound and graphics cards, and 56K modem. The next model up, the G6 266, could be better value: it costs pounds 1,138 but includes a colour inkjet printer alongside the faster chip and bigger drive.

HEWLETT PACKARD BRIO 8314

pounds 821 inc VAT

HP is currently selling this Intel Celeron-based PC at a bundle price including a monitor. The approach is no thrills, but the price is low. The Celeron chip runs at 266Mhz, the monitor is 15in, there is a 2Gb hard disk and 32Mb RAM. The PC comes with PC Doctor and McAfee Anti-Virus, but no business applications on this model. The computer has basic 2Mb graphics and sound cards but no CD-Rom drive.

APPLE iMAC

Expected price around pounds 999

Apple is back in the consumer market with a vengeance. The iMac is an all-in-one design - something Apple has tried before - but this time the case is translucent. Inside, there is a 15in monitor, a fast modem, 32Mb RAM, a 4Gb hard disk and a 233Mhz G3 processor as well as built-in ethernet connection. Oddly, it has no floppy drive. The machine will be available this autumn, and Mac fans should find the wait worthwhile.