Home PCs: The next battleground

Krishnan Thiagarajan

THE HOME PC and the SOHO (Small Office Home Office) segment are two promising target markets likely to register impressive growth rates over the next five years.

They are expected to be the next battleground for the price war among MNCs, such as Compaq, HP and Dell, and domestic manufacturers such as HCL Infosystems, Wipro, Zenith Computers and GID (Genuine Intel Dealers/assemblers).

According to an IDC (India) research forecast, consumer desktops (or home PCs) are expected to record the strongest compounded annual growth rate of 56.9 per cent between 1999-2000 and 2003-04 vis-a-vis 40.7 per cent for commercial desktops and 26.8 per cent for portables. A study by IMRB for the Manufacturers Association of India (MAIT) revealed that of the 14.05 lakh PCs sold in 1999-2000, nearly 2.87 lakh PCs went to the household segment (pure homes picking up 2 lakhs, up an impressive 67 per cent over the previous year, and home offices the rest).

Home PC evolution: The market for home PCs evolved only in the last three years. Before that, in late 1995-96 and early 1996-97, most MNCs, such as IBM with its Aptiva range, HP and Compaq (although it was the earliest to change), targeted the ``price high -- skim-the-cream'' households to build home PC volumes.

But two developments caught them by surprise. One, the realisation that the business-centric model was fraught with risks during an industrial slowdown. Considering that both the domestic manufacturers and the MNCs had to create a new market, and one with depth, to survive. That is when it stumbled upon the family-buyer-driven model and decided to shift to this approach.

This process may have been slow had it not been for parallel developments in 1996-97. PC assemblers -- conventionally called the grey market -- had built decent volumes by 1995-96 catering to the home and SOHO segments. However, by mid-1996, the MNCs, attempting to break the grey market stranglehold, dropped the prices for branded products to decisively impact the home-PC-buying segment. And this left the assemblers with no choice but to develop a strategy to defend their turf.

Then the microprocessor giant, Intel, dealt a masterstroke. Sensing that the Indian market was price-sensitive and would expand only if the price was attractive, Intel decided to tap the services of the assemblers operating in the lower price-band markets. Since the only thing these assemblers lacked was the legitimacy that the branded companies enjoyed, Intel stepped in with the GID scheme. For the first time, the dealers got some legitimacy. By pumping in funds in a marketing blitzkrieg, Intel convinced the buying public that GID was approved by it to sell PCs with its microprocessors. This changed the buying paradigm. The assemblers, particularly the branded assemblers, have constituted a key chunk of the PC market since then.

The revolution: As vindication of the shift from the corporate-centric to the home/SOHO model, the IDC report says the home PC market has grown by 80 per cent annually over the past three years. According to IMRB, in the overall PC market, the assembled PCs accounted for 58 per cent of the total PC market in 1999-2000, up from 53 per cent the previous year. The study also added that the assembled PC market had doubled since 1997-98, up from 3.7 lakhs to 8 lakhs in 1999-2000. Having gained legitimacy through the GID scheme, the branded assembled PCs accounted for 24 per cent of the total assembled PC market of 58 per cent in 1999-2000.

Attacking the `soft' spots: Breaking into the home PC market has not been easy. The industry has been working on the soft spots since 1995-96 and the breakthrough, to some extent, has come about in the last couple of years. Clearly, the five key forces acting on the home PC market are:

The `pricing' barrier: The initial fascination for the high-priced skim-the-cream business model has clearly broken down over the past few years. The rise in the share of branded and unbranded assembled PCs shows that India continues to remain an extremely price-sensitive market. Even the domestic manufacturers such as HCL Infosystems, and MNCs, such as HP and Compaq, have begun a `price game'. Both HCL Infosystems, with its Beanstalk model, and HP, with its Pavilion model pegged at the higher end of the price band, have found few takers in the Indian market. The success of HCL (with its low-priced and standard Busybee model) and HP (with its Brio model) are attributable to the low pricing and `value for money' features.

HCL has consistently aimed at widening and deepening the market with roadshows and carnivals across the country. HP turned the slogan of Zenith Computers `MNC value at Indian prices' on its head through the Brio model in 1999-2000. Competitively-priced, the Brio model clearly captured a good chunk of Zenith Computers' market share.

While HP's sales volumes in consumer desktops (or home PCs) grew from 0.4 per cent in 1998-99 to 4 per cent in 1999-2000, it cannibalised Zenith's (in sales volumes) market share, which declined from 9.1 per cent to 4.6 per cent over the same period.

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According to the IMRB study, the share of Indian brands shrank from 25 per cent in 1998-99 to 19 per cent in 1999-2000, with the MNC brands rising from 22 per cent to 23 per cent over the same period. The two main beneficiaries of this rise were HP and Compaq.

Lack of perceived need: In the past, the market in India for home PCs was not nurtured to make computers as much of a consumer appliance as a TV set or a music system. Only in the last couple of years has the home market been focussed specifically, with a value proposition targeted at `work-at-home' benefits for office-goers and as a tool for edutainment (combining education and entertainment) for children and adults alike.

According to the IMRB study, the potential of the home PC market is huge and one look at the profile of buyers brings this out. The profile of the buyers shows that first-time users constitute over half the market for home PCs in 1999-2000. In the second half of 1999-2000, 67 per cent of the buyers bought a PC for the first time, accounting for more than 50 per cent of the home PC sales.

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The `Internet' trigger: In the past, the poor telephone infrastructure and the monopoly over providing Internet hampered the home PC industry's growth. But the improvement in the dial-up infrastructure (there is, of course, considerable scope for improvement) and privatisation of Internet service provision led to a virtual market explosion. The IMRB study showed that the overall Internet market grew an explosive 151 per cent to around 8.73 lakh connections. In particular, the Internet connectivity to the home segment at 3.85 lakhs grew a staggering 205 per cent, surging past the growth of business connectivity at 118 per cent (at 4.87 lakh connections).

As if to emphasise the Internet trigger, the IMRB study also showed that 60 per cent of the home PC buyers bought one with an Internet connection. Another market survey by IDC (India) showed an exponential rise in the intention to get Internet connection. The survey points out that only 17 per cent of the households which purchased a PC intended to have an Internet connection at home in 1999. But in a startling revelation, nearly 79 per cent of the households which purchased a PC in 2000 said they intended to get an Internet connection at home.

Developing `mass' markets: Going forward, the real challenge for the PC industry lies in the developing a mass market for PCs. To achieve this, a two-pronged initiative may be necessary. To develop the mass market, the price points for PCs may have to be lowered. They are now stuck at the 35,000-40,000 for branded PCs.

A Pertech Computers (PCL)-type of pre-configured/assembly line for PCs, launched in August 1996, making a PC available for the price of a TV set may be needed to be relaunched. Though the strategy was unsuccessful and had to be aborted, it may have succeeded if the distribution problems and cashflows were handled better and the branded assemblers were more aggressive in launching a nationwide campaign by driving the price points down to truly affordable levels. The mass market, below the salary level of Rs 10,000-Rs 15,000, remains untargeted. Secondly, major investments have to be made by almost all the PC manufacturers and MNCs to introduce the PC in the vernacular medium, and fully exploit this segment.

Absence of financing options: The absence of attractive financing options is proving to be the biggest impediment in providing depth to the PC market. In the Western world, the PC is available at supermarkets, jostling for the consumer's attention along with other durables such as TVs, refrigerators and washing machines. Though the PC still needs considerable hand-holding, it underscores the point that it has not yet been recognised as a consumer appliance. Only when it is so recognised and made as commonplace as any other appliance, attractive financing options will develop. At least for that sake, proper segmentation of the market into metros and other towns needs to be made and the former (say, Mumbai or Delhi) can be exploited through the supermarket route.