Why Rivals Are Thanking HP and Compaq

Delisted from the Nasdaq stock exchange, burning through cash, and so

despised for its poor customer service that many retail clerks tried to talk

customers out of buying its machines. But on Sept 4, the company got a new lease

on life in the form of HP Co’s proposed purchase of Compaq Computer Corp.

Since then, retailers once again have been making room for eMachines. As of

February, its PCs took up 13.8% of shelf space in U.S. stores, vs. 10.1% in

August.

Yet the merger is already working in favor of second-tier, home-PC makers.

The reason: An HP-Compaq combo would claim 70% of the $7.5 billion US retail PC

market. So to give customers more choices and to keep HP from becoming strong

enough to dictate prices, retailers are stocking up on other brands. As a

result, HP-Compaq’s share is expected to fall to 50%. "Retailers are far

too smart to let leverage shift to the supplier," says one HP rival.

"Retailers will either find a competitor or create one."

That puts up for grabs the 20% of the home PC retailing market HP and Compaq

could lose–some $1.5 billion in business. Fierce competition has forced others–IBM,

Packard Bell, Acer, –out of stores. And except for a few models sold at its

Gateway Country Stores, Gateway Inc. sells direct, as does biggie Dell Computer

Corp. That leaves the spoils to the B-team.

Those most likely to gain ground are eMachines, Sony, and Best Buy. eMachines

is becoming a sought-after alternative for sub-$1,000, no-frills PCs. With the

number of major PC brands sold at retail falling in the last few years from

eight to five–and now maybe four, "we have to represent choice,"

says David Morrish, a Best Buy senior vice-president.

Extra shelf space, however, doesn’t guarantee success for the PC also-rans.

The hardscrabble business is suffering from sluggish demand, a bloody price war,

and rising component costs. That makes it tricky for PC makers to maintain

profitability, especially since the models don’t differ a lot from one brand

to the next. Of the home-PC leaders, only Dell and HP consistently have been in

the black. "Brands can limp along for years without gaining traction,"

says IDC analyst Roger Kay. "They have to deliver on their romises."

If they do, the added volume could do wonders for the smaller players. Sony

stands to gain the most. For starters, it’s profitable: Sony boasts a gross

margin of 20% on its PCs, vs. an industry average of 18.5%, says Technology

Business Research. Designed for those who want to make home movies or create

music, its PCs have pricey features–such as an attached digital camera on its

high-end notebook that takes still and moving pictures.

Best Buy also hopes to win with entertainment-oriented PCs. Sure, there’s a

history of store brands that flopped due to low brand recognition and the

complexities of managing inventory. Still, early signs are promising: for best

buy.

eMachines has yet to overcome its rep for abysmal service, although it is

retraining service staff and has cut return rates by 60% by mailing replacement

parts. With gross profits of under $100 per PC, only big volumes can lift its

bottom line.

By Arlene Weintraub in Los Angeles in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc