Hard Truths for the PC Industry

on April 13, 2015

I can’t think of any single computer that has as tough of a transition as the traditional PC. By PC I mean, “computer in the shape of a desktop or notebook”. Computers come in many shapes and sizes, but the ones shaped like a desktop or a notebook have had a rough couple of years. I have the good fortune of being on record that the PC industry in 2013 was going to be ugly but that 2014 was not going to be quite as ugly. Our estimates for 2013 anticipated an even more dramatic decline than my colleagues at IDC and Gartner and 2013 was even worse than our firm’s most dramatic declines. We have done the post-mortem on what happened in 2013 and why 2014 was better. So it is time to look at 2015.

We are getting signals from vendors and supply chain that 2015 is off to a rocky start. The rebound of 2014 was largely driven by an IT refresh bump that appears to be short lived. We are anticipating the launch of Windows 10, which, at the very least, may help the PC industry by getting IT to migrate off Windows XP and Windows 7. Windows 8 did not advance the cause so the hope lies on Windows 10. The problem is IT will not start any serious upgrading in 2015 with Win 10. Only IT early adopters will make a move, largely for testing, which means we can’t count on IT to help boost any PC sales this year. This is one reason we are looking at a few quarters with greater than 5% declines.

I have no doubt Windows 10 will move the adoption curve for IT eventually, but questions remain about the industry as a whole. With so many computers of other shapes and sizes stealing attention from PCs, do regular people need them anymore? When I tackled the side of the argument as to whether the PC segment could ever grow again, I focused on new users. However for the foreseeable future, I see a steady hold pattern for the PC industry, with a chance of moderate decline. Here is our PC model charted, which I will also dive deeper on for Tech.pinions subscribers and reveal other relevant PC industry charts tomorrow.

Screen Shot 2015-04-12 at 7.20.44 PM

By “hold pattern” I mean moderate declines but nothing terribly drastic on the horizon such as we saw in 2013. We have an extremely good sense of what the genuine and active PC installed base is broken out by IT (places of employment or corporate ownership) and consumer ownership. The replacement cycle for IT alone can keep the PC industry in the high 200 million to low 300 million range for a few years. But the long term health of the industry still depends on consumer PC ownership. With that market, I genuinely have no idea if a PC refresh is coming.

What the PC industry has to settle on and accept is that, right now, everyone who believes they have or need a PC has one. If you do “deep work” (work that requires hours of computing usage, not minutes or seconds), then you likely need a PC. However, thanks to smartphones, most average consumers’ usage of PCs is only measured in hours a couple times a week at most and more likely only a few times a month. We have all the hard evidence we need to recognize that, in the mainstream consumer market, the smartphone has essentially sucked up a lot of time from the PC, except for a few tasks here and there. So the question is, will more consumers over time conclude they don’t need a PC or can PC OEMs, chipset companies like Intel and AMD, give them reasons to still “need a PC?” And even if they conclude they do need a PC, yet realize they only use it for a few hours a week or month, then how much will they be willing to pay for it? All of these are very tough questions with only vague answers for the time being. However, I’m making a broader point about the category in the shape of a desktop or notebook. The truth is, it is not growing. So the best we can hope for is mild decline. More importantly for everyone who plays in the PC ecosystem, they need to take full advantage of the existing PC base and, if possible, make a move to get ASPs up and not down.

This is my point about everyone who needs a PC has one. If those in the PC ecosystem strive to monetize this existing base “better” then the sector can remain healthy. A good example of this is a direction I believe Intel can go. While the scenario I lay out is grim for Intel’s chipset growth, they can monetize their existing base better by upselling OEMs on their newest offering of an Intel modem. Integrating the Intel modem onto all their mobile PC silicon going forward could lead to better margins for them. This is why I do not believe it is that far off where we will see Intel LTE modems in notebooks. Whether the end user ever connects it or not, or even is some percentage subsidized as on Chromebooks, we will see. But built-in connectivity in notebooks make sense as an offering. Where in the past, modem attach rates in PC has been quite low, I can see a scenario where those who value and need notebooks can be incentivized by their carriers to add a PC to their wireless bundle.

It is the angle of better monetizing the existing base I’m watching for in the PC industry. I do not believe dramatically decreasing the cost of PCs will help. All a $200 PC would do is kill margins for OEMs and it would not lead to an increase in PC sales in my view. It is healthier for all to keep ASP steady and look to add value with each generation.

Lastly, I expect more consolidation in the PC industry. I still believe a number of existing PC OEMs are in for a very rough ride and may ultimately end up being out of the PC hardware business entirely. There is also an interesting angle to play out with the China tech manufacturing ecosystem, opening the door to local PC brands the same way we see local smartphone brands emerging in areas like China and India.

Overall, the question for the PC industry is not growth. We know the answer to that. The question is now around the health of the PC industry. How OEMs navigate the waters the next few years will be key to the shape this category takes over the next few years.