Spotlight

Today’s Consumer PC Market:

You Get What You Pay For, and
Then Some

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

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 Spotlight

Report: in getting consumers off the couch and into the store to up their holdings in computer gear. As
illustrated in the chart to
Today’s Consumer the right, the number of
PC Market: You Get
desktop systems advertised
What You Pay For,
in free-standing inserts
and Then Some
(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

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 Spotlight

Report: comparable promotions a year ago.

Today’s Consumer As for non-bundled purchases, conventional standalone value PCs have also declined an average
PC Market: You Get of $50, from a non-promotional $449 ASP in March 2005 to $399 in March 2006. While rare,
What You Pay For, there are standalone PCs selling for as little as $328.
and Then Some

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

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 Spotlight

Report: promotion dated March 19, Mainstream PC Promotion Mainstream PC Promotion

2006 and a $649 bundled PC March 2006 March 2005
Today’s Consumer promotion dated March 21, Brand Compaq SR1726NX Compaq S6308NX
PC Market: You Get
2005. CPU Athlon 64 3400+ Pentium 4 2.6 *
What You Pay For,
and Then Some RAM 512 MB 512 MB
At a promoted price of $439,
the 2006 Compaq’s $210 price HDD 160 GB 80 GB *
ODD DVD+/-RW DVD and CD-RW *
advantage over the $649-
priced 2005 Compaq is clearly Display 17” CRT 17” CRT

evident, but what’s under the Warranty 1-Year 1-Year

hood matters, too. The 64-bit Street Price 759 1049
CPU, double hard drive and Savings 320 400
rewritable DVD components End Cost 439 649
are performance wins not to
be taken lightly. In fact, they * Performance disadvantages are highlighted in red
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

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 Spotlight

Report: comparison: an extra CPU core Enhanced PC Promotion Enhanced PC Promotion

(Intel’s Pentium D is a dual-core March 2006 March 2005
Today’s Consumer processor), double the memory, Brand Gateway GT5040 HP a434n
PC Market: You Get
90 Gigabytes more hard drive CPU Pentium D 820 Pentium 4 2.8
What You Pay For,
space, a supplementary DVD RAM 1 GB 512 MB *
and Then Some
optical, Windows XP MCE HDD 250 GB 160 GB *
and a 17-inch LCD (compared ODD DVD & DVD+/-RW DVD+RW *
to last year’s 15-inch LCD).
OS Windows XP Media Center Windows XP Home
Although not quite top-of-
Display 17” LCD 15” LCD *
the-line components (those are
Warranty 1-Year 1-Year
saved for the performance class),
the feature sets in this category Street Price 1079 1499

elevate today’s enhanced Savings 180 300

computer buyers to another End Cost 899 1199

plain and one can almost hear * Performance disadvantages are highlighted in red
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. g

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