Insight on the Consumer Notebook and Desktop Market

It is clear a massive behavioral shift has taken place in consumer markets. In the recent past, the PC industry was growing and filled with optimism as consumers began to buy PCs and, specifically, to buy notebooks. Consumers valued the freedom to use their PC anywhere in their house as it became clear consumers value mobility. This was a fundamental reason netbooks hit the scene and spiked sales. The lessons we learned from consumer behavior around netbooks was the best writing on the wall of what was coming for the consumer PC segment. Netbooks were not being used by the mainstream to replace PCs. Instead, they were simple additional “internet terminals” for use in the home. We look around today and take for granted how many screens we have in our possession capable of browsing the internet. But in the days when the netbook was surging, most people had, at best, two internet terminals in the home. The netbook made for an additional and inexpensive internet terminal, helping to solve the battle for usage in multi-person homes.

Much of what we observed in the consumer segment from a behavioral standpoint of notebooks and netbooks usage predicted the coming disruption of the consumer PC segment by smartphones. I did some specific research on consumer notebook use in those days and discovered an interesting point. The average consumer used less than 5 apps on their PC and none were CPU intensive. This observation was the paved road which leads to the reality that PCs for the most part over-serve the needs of the mainstream consumers and smartphones are well positioned as the primary computer. It is within this framework I struggle to see how the PC ever returns as a dominant or primary computer to mainstream consumers.

So what happens to the consumer PC segment? This is a question those in the PC industry need to focus on. There is no doubt the commercial PC segment is healthy and will remain so. While the global PC industry can remain healthy if we lose the consumer PC segment’s average annual contribution of approximately 155 million units, the PC industry can not sustain the many players in it today with those volumes. Which means I expect consolidation will happen.

While I don’t believe the entirety of the approximately 157 million global consumer PCs will go away, I could see that number dropping closer to 100m in the next few years. Meaning, annual PC shipments would normalize to the approximately 250m range vs the roughly 300m number we see today.

Who Competes for Consumer PCs?

While this seems like a somewhat doom and gloom narrative for the PC sector, it is not. It is my belief that, as we see PC volumes normalize (meaning those who want and need them remain the customers, and those who don’t really need them move on), we will see healthy ASPs remain. If you know you need a PC, you value it and therefore you are willing to invest in it. So the true TAM for a notebook or desktop will be in search of a product worth investing in. This is where quality, specs, innovation, and a host of other very positive things for the category become sustainable across the board. I truly believe it would be a fool’s errand for the PC players to simply rush to commoditize PC hardware in search of consumer volumes I don’t believe exist.

I believe four companies will remain in the PC business and compete for both commercial and consumer PCs. Lenovo, Dell, Apple, and Microsoft. Lenovo and Dell will be more heavily geared for commercial volumes than consumer in terms of their mix of unit shipments. Apple remains well positioned to gain share in the PC sector in both commercial and consumer notebooks and desktops. Going back to my point that those who know they need a PC and value it will be looking to make an investment. They know they won’t be replacing it any time soon and will want it to last. This is the sweet spot in Apple’s value proposition and, with the additional customer service they offer at Apple Retail, it helps as well for consumer peace of mind. Lastly, I believe the consolidation in the PC vendor area will bring Microsoft forward to become more aggressive in making PCs — more than just the Surface. I believe it is inevitable Microsoft will make notebooks and even desktops at some point. Given Microsoft’s increasing retail experience, I believe they could compete well in the consumer PC market.

Desktops Re-Emerge in Consumer Sector

With regard to PC pricing, I am talking specifically about notebook ASPs. I believe the notebook form factor should essentially maintain its ASP and even climb closer to premium ASPs. This goes to a point I’ve been making that the notebook, more than any PC form factor, is becoming a specialized device. Something for the most mobile worker who needs and values portability and is therefore willing to pay for it.

Desktops, on the other hand, I see becoming more commoditized and thus better positioned as the mainstream consumer PC. I remain convinced the short-lived love affair consumers had with notebooks has shifted to their smartphones. Consumers simply do not use their PCs hours and hours each and every day like those in the commercial segment. Therefore, for a product you don’t use every day and only need on occasion, how much will you pay for it? This is perhaps where a flexible desktop comes into the picture. Which is why, for the time being, I can still see a role for the consumer all-in-one PC.

More specifically, I’m optimistic on the value proposition of the portable all-in-one for the consumer PC segment. This form factor offers a new paradigm for a desktop computers that are untethered from the desk and can bring in other use cases than just deep work. Family gaming on a large touch screen, using it as portable TV for around the house or yard, etc., all bring in additional use cases than what people have expected of their PCs. But the point remains, I don’t believe consumers will spend upwards of $700 on such a product. If these portable-all-in ones can get into the $500 range or lower, I believe we could see this segment become attractive to consumers. My advice to all PC OEMs is to be aggressive on price in this form factor and not notebooks.

Lastly I’ll openly admit our crystal ball related to the consumer PC market has never been this foggy. We, like many of our colleagues in this industry, do “Intent to Purchase” quantitive research and the answers we’ll get from the mainstream consumer market will likely offer extremely mixed signals. More mixed than any year previously. It makes predicting exactly what consumers will do with any confidence extremely tough right now. We know there are somewhere in the range of 300-400m consumer PCs in use that are getting old and are ready to be replaced. However, given the behavioral shift I mentioned, we aren’t sure what percent will actually make a move to refresh their PC this year, next year, or ever. What I’ve articulated here is a mix of both my best and worst case scenarios for the consumer PC segment. The holiday quarter 2015 will be the quarter where we see what consumers decide. My hope is that, by Q3, we get some insight as to what may happen in the consumer PC segment so we can update the industry.