Pull up to the Punters
A computer in every home was once the dream of the PC maker, but now the bubble has burst on the dream of affordable PCs for the masses, writes Andrew Charlesworth
Once, all the big name PC makers were keen to exploit the consumer mass market. They jostled for retail shelfspace and they trumpeted their wares on TV. The machines are still on the shelf, but their prices are higher than ever. What happened to the dream of affordable computers for the masses? Everyone expects PC prices to fall. At best the price stays more or less constant, but the functionality it buys increases monthly. At retail, specifically in the market-leading multiple retailers, the price of the average PC has been rising steadily. The decline of PC prices has been taken for granted for almost as long as the PC has existed. Just as Moore?s law dictates that the number of transistors which can be integrated on a given size of silicon doubles every 18 months, so it is exp-ected that the price of leading edge technology will fall as it is superseded and pushed into the mainstream. Indeed, the whole industry has been built on this dynamic, with early adopters paying a high price to recoup development costs and the low-margin mainstream providing the profits. But development costs are now so high, particularly for processor technology, that there aren?t enough early adopters to cover anything like half the development costs of a new processor, so the technology has to be pushed into the mainstream faster than ever. Intel is usually blamed for pushing the pace of technological change faster than is nee-ded by users in its drive for higher profits. But when Intel rolled out the first Pentium chips in 1993, the company revealed interesting statistics which showed it is as much driven by this cycle as driving it. Processor power and software demands tend to leapfrog one another, and the drive to make computers easier and more natural to use has put huge demands on processing power. The cost of developing a new processor is such that Intel?s management bets the company on the next generation every 18 months or so. But as each generation gets progressively more expensive to develop, Intel needs greater returns to be able to develop the generation after it. One only has to look at the increased speed with which each successive generation has reached a mainstream price of, say, $2,000. The 386 chip stayed with early adopters, only coming down to sub-$2,000 prices five years after its introduction. The 486 took close to four years to reach this level, but the Pentium hurtled from servers to consumers in 10 months. Intel had to push the Pentium chip, not just into the business mainstream, but also into consumers? homes within a year of its introduction so it could recoup the $5 billion or so it had spent developing it. It is no coincidence that the introduction of the Pentium chip corresponds with the start of the PC manufacturers? big push into selling home PCs ? mostly through retail. A couple of years earlier, US analysts made alarming predictions about collapsing demand for business PCs. Market saturation combined with worldwide economic downturn would slash the previously buoyant PC market growth rate down to single figures. What were PC makers, used to double-figure growth rates, to do? Where could they sell their machines in the volumes required to keep up a 10 to 15 per cent growth rate? The answer to their dilemma was the home market. In the US, households were buying PCs in their thousands without the PC makers ever really trying. High expendable income, the spread of Internet-based email and an employment ethos that blurred the traditional distinctions between work and home life, were fulfilling the hippy dreams of the PC?s originators. Characters like Steve Jobs and Steve Wosniak, who believed that the power of centralised government and big business could be undermined by giving everybody a computer of their own. Faced with a downturn in their traditional business market, the big PC makers seized on the opportunity. Suddenly PC makers were introducing low-ticket PC ranges for the consumer, recognising that European homes had lower levels of expendable income and that two-thirds of US consumers still had to be pers-uaded to take the plunge. IBM, Compaq, AST, Apple, even ICL ? they were all there. The battle was on to produce the best multimedia machine that would retail for about #1,200. And as each manufacturer launched its latest built-for-the-home range, they took it in turns to accuse their competitors of dressing up tired old business machines and calling them consumer PCs. Building machines was the easy bit ? selling them to consumers was the hardest. The off-the-page PC makers had been selling to knowledgeable home users for years. But to appeal to the first-timers, most PC makers that use traditional three-tier reseller channels, had to go through retail. Now, while PC manufacturers work on 12 per cent margins, multiple retailers start negotiating at 40 per cent. And on top of that, they want price protection, sale or return deals and co-operative marketing funds which make a big hole in the average UK marketing manager?s budget. Against their better judgement the manufacturers bit the bullet and put up with supplying PCs at a loss in the belief that one day, the mass market would happen. When it did, they would be there, ready, with machines on the shelf. But the mass market for consumer PCs never happened. Market researchers showed that only one in 20 European homes could afford a PC even at entry-level prices. More to the point, most of the one in 20 didn?t want one. Pretending the PC was a mass-market consumer electronics device didn?t help. Con-sumer electronics devices are usually built for one purpose: the hi-fi to play music; the TV to watch broadcast programmes; and the telephone to talk to other people. But the PC is the jack-of-all-trades. It can be a work machine, a TV, a games console, an educator and a telephone answering machine. But it doesn?t do these things as well as the dedicated machines, and at #1,500 is a prohibitively expensive Swiss Army knife. Fujitsu ICL tried selling a PCTV as the ultimate consumer electronics gadget for Christmas 1995 ? a 100MHz 486 with a suite of software and a nifty analogue TV tuner. It bombed. People who grew up with dumb terminals and C-prompt character-driven PCs are stunned by what a PC can be made to do these days. But consumers look at their #400 Nicam digital stereo TV and their #200 Sony Playstation and ask why they have to sacrifice next year?s holiday abroad for a machine that can do both things not quite as well as the individual items. None of the PC makers have made money selling PC hardware to consumers through retail. Even Packard Bell, which sells exclusively to consumers, had to be bailed out in 1994 by Intel extending its credit facil-ity to a figure rumoured to be $40 million. Publicly, the manufacturers say their consumer divisions are profitable, but if they were to be spun-off as separate businesses they would not attract many investors. All PC manufacturers shelter loss-making consumer PC sales. At least, they did until now. The second half of 1996, and in particular this Christmas just gone, has seen sense. The drive for profitability prevails. German PC maker and ret-ailer Escom believed in the viability of low-priced mass-market PCs right up to the point at which its business was flushed down the toilet of insolvency. Many industry observers expected the demise of Escom last summer to send a shockwave through the other retailers and their suppliers, perhaps even to set back the consumer PC sector by two years. But the market seemed to carry on with barely a blip, except that all the remaining players took a quick step upmarket. The majority of PC makers have abandoned selling high volumes of low-margin PCs to a mass consumer market. The egalitarian marketing language of technological enfranchisement for all has been replaced by the need for profits. Hence average PC prices at retail rose in the latter half of last year. These changes were first shown in the figures of Context market research which conducts walk-in surveys of major high street retailers. In August, UK PC retail prices rose about eight per cent, even though they were still falling by as much as 16 per cent elsewhere in Europe. In that period, although the #1,500 to #1,600 price band remained the most popular in terms of the amount of shelfspace devoted to it, the #1,750 to #1,900 band doubled its shelfspace share from seven per cent to 14 per cent. The #2,200 to #3,000 band incr-eased from three to 10 per cent of retail shelfspace. In 1997, retail PC prices will remain high as the big brand names concentrate on low-volume, high-margin sales. In late August, Compaq launched a range of home PCs which Lisa Clark, Compaq consumer division senior product manager, said ?defines what we mean by a consumer PC?. This meant consumer electronics refinements like a volume control on the front panel instead of buried in software, and price tags which stretched above #3,000. ?Although we won?t do lots of volume, there will always be a market there ? and a pro-fit,? says Hamish Haynes, marketing manager of Compaq?s consumer division. Thus the cheap mass-market PC was pronounced dead. Compaq was joined at the graveside by IBM, AST, Apple and every other big brand name. By October these manufacturers were predicting that their Christmas top-sellers would be #1,700 to #1,800 machines. This desertion of the mass market was reflected in their advertising budgets. A couple of years ago Compaq stuck its neck out and spent millions on a lengthy high-budget pre-Christmas TV campaign. It did much to plant the benefits of having a PC at home in the minds of consumers, but it is more famous for the fact that Compaq vastly underestimated demand and ran out of stock in November, leaving its competitors to benefit from increased consumer interest. This year Compaq, like the other brand names, directed its money into PR and other below-the-line activities. These were marketing smart bombs compared with the thermonuclear TV campaigns of previous years, leaving only Packard Bell among the manufacturers to preach its ?wouldn?t you rather be at home?? message. The best ads are from the likes of Dixons Group?s PC World, which show lots of happy, smiling people walking around in warehouses stuffed to the metal rafters with computer kit. They assume you know why you want a PC at home and can afford one. When the flurry was on to provide cheap PCs to consumers, industry observers wondered when Hewlett Packard would get in on the act. It was criticised for being slow to bring its considerable manufacturing resources to bear on the consumer market. Eventually HP pitched in last summer just as all the other big brand names moved upmarket. The company never went through the phase of selling loss-making consumer PCs in Europe in the hope that the market would pick up, so it has managed to command a healthy market share without sacrificing profitability. Whether this is deliberate and canny timing by HP or just the fortuitous accident of a large company responding slowly depends on one?s cynicism. Even consumer supremo Packard Bell has moved upmarket, selling machines in the #1,500 to #2,000 bracket. There are still cheap deals to be had, for example the #499 Olivetti systems promoted by Radio Rentals at the end of last year. But these 486 machines are not going to appeal to large numbers of consumers and are simply a method for disposing of end-of-line ex-rental systems. Now the big brand names have abandoned the mass market and are only interested in selling PCs to rich people, they have left competing on price to off-the-page manufacturers and small independent assemblers. But because of the nature of their business model, off-the-pagers sell to knowledgeable customers buying second or replacement systems. Indepen-dent assemblers are concentrating on local small busi- nesses. First-time consumers take too much pre-sales effort and post-sales handholding. Next it is the turn of the #300 network computer (NC) to convert the mass market for home computers. That there is sufficient consumer interest in the Internet to shift a few thousand home NCs nobody really doubts. Whether the consumers will be rushing them back to the shops when they find out what a disorganised morass of mostly useless information awaits them online, remains to be seen.