The Great PC Price War

THE CRAZIEST YEAR IN PERSONAL COMPUTING HAS got even crazier. Compaq, which set off a fierce price-cutting war this summer when it slashed its PC prices one-third, has trimmed the tags on some models an additional 32%, bringing the cost of its cheapest desktop machine to below $800 -- a fraction of what customers were paying for PCs with a lot less memory and power just a few years ago.

But there is method in this madness. By slashing prices, big-name U.S. computer makers are not only squeezing out cut-rate foreign "clones," but they are also whipping American consumers into a PC-buying frenzy. Compaq, which shipped 200,000 machines in September alone, reported record third- quarter sales last week. Apple, which has been whittling down its hefty margins, watched its income soar 71% during the past year.

Even mighty IBM has caught the fever. The world's largest computer maker was slow to respond to the rounds of price cutting this summer, and as a result its share of the personal-computer market slipped precipitously. But Big Blue's freshly restructured PC division showed a new nimbleness last week. The day after Compaq's latest price cut, IBM unveiled its long-awaited PS/ ValuePoint series: a line of desktop computers aimed at high-volume corporate buyers and priced to sell for less than comparable Compaq machines -- in one case, exactly $5 less.