Dell Computer Corp, which launched the current price battle at the end of last year, now is tossing in free delivery, a free printer and free Internet access to customers who buy a PC through its Web site. That's a good thing for customers. But computer makers are reeling as the stiffening competition slices into profits. Compaq Computer Corp., the world's largest PC maker, said earlier this month it will consolidate operations and cut more than 7,000 workers to help compensate for new price reductions. Other major players also are axing jobs and warning investors of lower sales.

In the past, computer prices have fallen steadily as they became cheaper to make, yet that simply fueled higher demand. But recent price cuts have been much steeper than anything seen before, and, combined with a slowdown in demand, could result in a first-ever decline in PC revenue in the US. If prices continue to fall at the current pace, the resulting squeeze also could trigger a wave of consolidation among the biggest PC makers, analysts say, as the companies try to cope either by selling businesses or seeking more market clout by acquiring competitors.

"The earnings risk from price pressure on all these PC hardware companies is increasing rapidly," warns UBS Warburg analyst Don Young. "At some point, either this industry says enough is enough, or ... everybody loses."

At the heart of the industry's troubles is a stunning slowdown in revenue growth. Recession fears have certainly hurt sales. But consumers and some companies also are holding onto their computers longer, in part because the powerful machines already provide more than enough heft for most computer tasks thrown at them. Combine that with an increasingly saturated US market, where 53 per cent of homes already have a PC and most businesses are computerized, and that means fewer buyers.

As a result, revenue from sales of all types of PCs is expected to decline nearly 6 per cent this year in the US, despite a 2.2 per cent increase in shipments, predicts market watcher International Data Corp. It would be the first such decline since the industry came of its own in 1981. Globally, PC shipments, which rose 15 per cent last year and climbed nearly that much in each year during the 1990s, are now expected to rise just 10 per cent this year, IDC says.

Home PC sales in the US, serving as the warning canary for the industry, fell 24 per cent in February, the third straight month of such declines. What's more, the drop-off also is being seen in small-business and corporate PC purchases. "I don't see much difference across these categories right now," says Webb McKinney, the head of Hewlett-Packard Co.'s new Business Customer Organisation. "It's very, very competitive."

In a call with investors earlier this month, Compaq chief executive Michael D Capellas said that in some ways, the decline in corporate markets is more abrupt than on the retail side. Sales to small and medium businesses are now on par with consumer declines, and have "deteriorated faster and deeper," he said.

Even the hottest-selling computers, so-called servers that run Web sites and networks of corporate PCs, aren't immune. In recent weeks, both Compaq and Intel Corp have sounded alarms on PC server sales.

Dell, which has used low pricing to carve out large gains in PCs and servers, says it has no plans to take off the pressure. Dell co-president Kevin B Rollins insists that Dell can continue its aggressive pricing and remain profitable. "We believe we are the lowest-cost producer," he says. "We can do better than our competition in a tough environment." Indeed, experts and customers see no sign of Dell relenting. Since October, Dell has lowered prices on its desktop and notebook PCs by 30 per cent to 35 per cent, compared with average reductions of about 20 per cent at International Business Machines Corp., Hewlett-Packard and Compaq, according to computer researcher IDEAS International Ltd.

And in PC servers, still the most profitable segment despite falling prices, Dell remains the lowest-priced provider after it overtook IBM last year. Helping fuel the current price war is a sharper reduction in the cost of computer components such as memory chips and hard disk drives. "I can't remember the last time I've seen such promos" on PC sales, says Scott Mt Joy, a principal with Nieto.com, a Houston networking provider and Web-site developer. Clark Hubbard, owner of CSI Data Systems Inc, a Norcross, Ga, computer dealer, says one sales representative for a computer supplier took a day and a half to return his call last year. Now, the salesman is calling him three to four times a week hoping for orders. "I can tell you they're hurting," says Mr Hubbard.

Already, Compaq, Dell, Gateway Inc. and Hewlett-Packard have announced work force reductions this year. Compaq told investors to toss out earlier expectations for 2001 revenue gains of 6 per cent to 8 per cent. While Compaq hasn't issued a new forecast, analysts believe its sales will shrink 5 per cent this year. H-P now projects sales to grow just 2 per cent in the current quarter. What's more, none of the companies sees any sign of a market rebound. To the contrary, the slowdown appears to be spreading to Europe, and now threatens sales in Asia, which has been the one industry bright spot. Total industry revenues are being hurt by the falling prices and sales volumes. International Data estimates that revenue will increase a scant 1 per cent to $219 billion, worldwide this year. But its outlook also relies on a hefty 20 per cent increase in Asia and a 17 per cent increase in Japan, which it now says may be too optimistic.

Based on recent economic trends in the Far East, "The worldwide number could easily go negative," says International Data researcher Roger Kay, on top of the negative figure IDC projects for the US. The tough times already are stirring industry consolidation. On Friday, Micron Electronics Inc of Nampa, Idaho, said it would exit the PC business to concentrate on Web-site hosting. Micron, which had $1 billion in PC sales in the last 12 months, said the "drastic downturn" in PCs was a catalyst in its retreat. It said it has a tentative agreement to sell the unit to an undisclosed private investment group. In the late 1990s, competitive pressures from larger companies forced niche players such as Packard Bell Electronics to combine with Japan's NEC Corp. and prompted Acer America Inc. to flee the cutthroat retail-store market.

Now, with a lot of the smaller players squeezed out, further consolidation is more likely to involve the major players, which command a much larger piece of the market. Around the world, the top five PC makers in each region control more than half of their local sales.

Dell's Mr Rollins says he believes consolidation in the industry is overdue. "To be very honest with you, I felt that someone would have to sell, or do something" by now, he says. It may only be a matter of time, says Bear Stearns & Co analyst Andrew J Neff. The stepdown in growth may mean the biggest companies will have to decide soon whether they are going to be a buyer or a seller in a consolidating market. "The key issue is, will Dell keep the pressure on?" says Mr Neff.

The Wall Street Journal