PC price war escalates

Computer makers are selling PCs at large discounts.

The personal computer price war seems set to pick up pace after the number one chip maker cut processor prices.

Most computer chips are getting cheaper...

Companies such as Gateway, Dell and Compaq have already slashed their prices by up to 29% in a head-on price war.

And chip maker Intel has now cut desktop processor prices by up to 19%, with further cuts for laptop ( notebook) processors expected later this month.

Cheaper chips will make it easier for the computer makers to cut prices further because the processor accounts for much of a machine's total cost.

Price cuts

Computer makers are slashing prices as part of their efforts to boost their market shares in the face of slowing sales of both PCs and laptops.

...but the price of Intel's latest Pentium 4 remains high.

The companies are keen to make room for the next generation Pentium 4 processor machines that are just hitting the High Street.

But many are finding it difficult to sell the PCs that are clogging up their shelves.

"There's still a fair amount of inventory. It's just not moving right now," said Chris Danely, an analyst with Merrill Lynch.

Some computer makers are also cutting the prices of notebook computers to take advantage of the change in customers' preferences, away from desktop machines towards portable laptops.

"There's never been a better time to go mobile," said Dell's David Marshall, listing a good economic climate in Europe, lower prices for laptops, and the improved performance of portable computers compared to desktops.

Not all chips are cheaper

Intel's latest price cuts have affected different types of chips in different ways.

Six chip makers issued profit warnings on Monday

Cypress Semiconductor

LSI Logic

Camarillo

Fairchild Semiconductor International

Xilinx

Varian Semiconductor Equipment

The biggest cuts were seen for processors that are on their way out.

By contrast, its Pentium 4 processor was only reduced by a few dollars.

However, the company cut the price of its Pentium 4 by 20% in January.

Both Intel and a series of other semi-conductor makers have suffered in recent months.

Chip makers struggle

A report out on Monday found that microchip sales fell for the third month in a row in January, by 5.7% compared with December.

"Chip industry momentum collapsed in January," said Bank of America analyst Mark Fitzgerald.

Also on Monday, six chip makers issued profit warnings, citing reasons such as cancelled orders, weakness among their computer making customers, and poor demand for their products from consumers.

But once the computer makers have emptied their shelves, their demand for chips is expected to rise.

This could happen later this year, said analysts, and stock traders seem to agree.

Shares in semi-conductor companies are showing some signs of rising from their current lows, despite the profit warnings and price cuts.