Are PC price wars a cut too far?

The number of PCs shipped worldwide will grow this year and next but PC makers are expected to take in about 0.4 per cent less in sales in 2006 from the $202.7bn predicted this year, according to a new report by Gartner.

The research firm said PC unit shipments are on pace to grow 12.7 per cent to total 206.6 million in 2005 and will increase 10.5 per cent to hit 228.29 million in 2006.

The statistics underscore the pricing pressure that's squeezing PC makers even as demand for their computers continues to increase.

Prices for a basic desktop set-up have hit rock bottom. CompUSA, for example, advertised a special this weekend for a $199.99 HP Pavilion desktop with a monitor after about $370 in rebates. Dell has been offering entry-level Dimension desktop computer bundles for $299 for some time, and desktop PCs priced at $399 are becoming more commonplace.

Price cuts are ordinary in the PC world but the recent price wars have forced vendors to look for even the most minute cost-cutting measures, according to the Gartner report.

Analyst George Shiffler, co-author of Gartner's quarterly global PC forecast for 2005 and 2006, said: "We're reaching a point where PC makers are testing how low the markets can go."

To pick up the slack, many PC makers are cutting back on computer memory, offering fewer features and installing smaller hard-disk drives as a way to cut prices and attract customers, Shiffler said.

Unit growth with no revenue growth has been a tricky phenomenon for a while. Last year, Gartner similarly reported that unit shipments rose about 12 per cent but prices went down about the same percentage.

Shiffler said: "Companies are trying to move people to mobile computers but they are also asking themselves are enough people still interested in desktops to make it a profitable business."

The HP Pavilion comes with 256MB of RAM, a CD-ROM and a 40GB hard drive, hardly the configuration consumers would want if they were thinking of burning a CD, watching a DVD or using the PC for video editing or high-end PC gaming. But the low-ball pricing helps get customers in the door, Shiffler said, giving them all sorts of opportunities to upgrade to an $800 or $900 machine.

Laptops are seeing cuts, too. Recently, Acer, Dell and HP trotted out $499 Windows laptops, a new low-water mark for major PC makers. In the past, only second-tier manufacturers offered laptops at this price, and even then they didn't include Windows.

Consumers' desire to shift from desktops to laptops is also propelling a replacement cycle, according to Gartner. That's good news for many manufacturers' bottom line: not only do laptops typically sell for more than desktops, they are also typically replaced faster by consumers.

In all, 46.6 million desktops, laptops and servers containing AMD, Intel, or PowerPC chips left factories between April and June of this year, according to Gartner's statistics.

Financial warnings from Dell and Gateway that PC sales were less than expected have also caught the eye of analysts who say PC makers may have reached their limit on the desktop front.

Shiffler said IBM's sale of its legendary PC business to Lenovo may just be the tip of the iceberg to the massive shift in the desktop PC market and recounted Gartner's prediction that three of the top 10 PC manufacturers would be exiting the market by 2007.

Japan's NEC may be the next in line. The PC maker is reportedly considering selling off its Packard Bell home computer division in a deal which could be worth around $180m, according to a report in the Scotsman. A representative with NEC declined to comment on the news.

CNET News.com's Michael Kanellos contributed to this report

Michael Singer writes for CNET News.com