The PC Decline: Four Key Points to Note

The PC market is in decline

The PC industry isn’t getting any healthier. Both IDC’s and Gartner’s figures for PC shipments in the first quarter are out and both show the same direction of travel: down 11.5% to 60.6m units for IDC, down 9.6% to 64.8m units for Gartner.

There are some variations between what the two count as a “PC”: IDC doesn’t include Windows tablets, 2-in-1s such as the Lenovo Yoga, but does include Chromebooks; Gartner doesn’t include Chromebooks, but does include 2-in-1s and Windows tablets. (You might think comparing the two datasets would make it easy to spot who is doing well in Chromebooks, and who isn’t doing well in 2-in-1s or Windows tablets. Sadly, that turns out not to be true; but we can say Chromebooks account for only a few million sales per year and there aren’t any clear signs of that changing.)

At the moment, PC shipments have receded below the point they were at in 3Q 2006 (by IDC’s data); that’s nearly a decade of progress wiped out. It’s a category in retreat. The peak was in 3Q 2011, at 96.1m (IDC) or 95.4m (Gartner).

There are a few points to note in what’s going on.

The Long Slow Goodbye

First, Windows PCs are in serious long-term decline, more so than Apple. Once you subtract Apple’s contribution, you find Windows shipments have been in a year-on-year decline for 15 straight quarters. That’s nearly four years.

Windows PC shipments are falling

Something Happened

Second, the trigger for that decline is entirely unlike the trigger for previous declines in PC shipments. If you look at the long-term view, there are three points since 1999 when Windows PC shipments have shrunk: near the end of 2001 (during a worldwide recession), the end of 2008 (during the global financial crash), and towards the end of 2012.

Three points where Windows shipments fell

What happened in 2012? Nothing external. Instead, the decline seems to have been prompted by the twin thrust of tablets and smartphones. Tablets became broadly available (the iPad 2 dropped in price) and smartphone screens grew larger (the first Samsung Galaxy Note, with a 5.3in screen, had been launched at the end of 2011, and the Note 2 was coming along).

Ben Thompson, writing at Stratechery ($subscription), suggests PCs are being disrupted. What we’re seeing is “less capable” and cheaper devices (tablets and smartphones) taking over the jobs that were being done by much more capable devices. But the users didn’t generally need that capability; browsing, email, writing text, organising and uploading photos and watching video, plus a few games, tended to fill the gamut of what most people need to do on a computer.

Certainly, all the signs are that Thompson is right. That 2012 decline points strongly to a change and, at Gartner, Mikako Kitagawa says, “The ongoing decline in US PC shipments showed that the installed base is still shrinking, a factor that played across developed economies.” A shrinking PC installed base? That must be quite a worry. But it’s what we’re seeing.

Linn Huang of IDC offers something of a hostage to fortune: “The PC market should experience a modest rebound in the coming months.”

The Others

Third, anyone in the “Other” category is probably getting pretty worried now. Even Acer has fallen out of the top five computer makers, displaced by Apple. (I continue to include it, estimating its volumes as slightly below Apple’s.)

"Other" PC suppliers, absolute shipments

"Other" PC players are being squeezed out

If you take “Other” to be companies such as Toshiba, Samsung, Fujitsu, and a myriad of others, then both their share and absolute number of shipments is going in a bad direction:
• Toshiba is struggling with an accounting scandal, and its PC shipments in the US fell by at least 25% in the first quarter, from 0.94m to less than 0.71m. The “Lifestyle” division, which includes the PC business, has seen revenues nearly halved since the calendar first quarter of 2014, and made an operating loss for the past 15 quarters.
• Samsung has withdrawn from Europe’s PC business and is hard to see elsewhere; its PC business is rolled into its IM division, which also includes its mobile division, for accounting. In Q4 2015 (the latest quarter for which there are figures) those revenues were US$780m – which would translate to 1m PCs sold at an ASP of $780, or more possibly 1.5m sold at an ASP of $520, or 2m at $390. (To make the top five for Q4 required shipment volumes of at least 5m.)
• For the fourth quarter, Fujitsu says revenues from PCs fell; it’s been saying that for at least a year.

There’s also a squeeze on Asian sub-scale PC makers, because the dollar’s strength hits them hard when they have to source components from the US (Microsoft Windows, perhaps?). That eats into profitability while the bigger players corner more of the market.

All this is going to lead to further consolidation. There’s already talk that Toshiba or Fujitsu will sell their PC businesses. Smaller companies might just shut up shop or seek a buyer.

Apple: Doing Fine, Thanks

Fourth, Apple is still solid. The USB-C Macbook is a year old and doesn’t show any sign of having set the PC world on fire but since the end of 2004 (a period stretching 46 quarters), Windows PCs have only seen faster than Apple growth in two quarters. Even while Apple’s total shipments (according to IDC and Gartner, ahead of Apple’s formal results later this month) fell in the most recent quarter, it was still nothing like the overall fall for Windows PC makers. Only Dell managed to stay upright better on the slippery slope, falling by 2.0% against Apple’s 2.1% (IDC); Gartner reckons Apple did better, showing 1.0% growth, but was bested by Asus with a 1.5% rise – perhaps through Windows tablet or convertible shipments.

What neither shows is that Apple commands the highest average prices in the industry. Once the figures for this quarter are in I’ll return to the topic but, for now, here are the figures for average selling prices (calculated from company financials and IDC shipment figures) for the big six PC companies:

Average selling prices for top PC makers

As you can see, Apple is miles above the rest there. That also means it can grab a healthy profit, which allows it to stay in business when others struggle.

Conclusion

For the longer term? PCs are contracting towards a core base of users who really want or need them. If people want to be able to plug in USB sticks or SD cards, there’s a PC there for them. But it turns out that lots of people don’t and they’re voting with their wallets. That’s creating a squeeze on the smaller players, but even the big players don’t have it easy – unless, like Apple, they can charge a premium.

How Intel Could Achieve the 40% Consumer Ultrabook Target in 2012

There has been a lot of industry skepticism since Intel predicted at Computex Taipei 2011 that Ultrabooks would account for 40% of consumer portable sales by the end of 2012. That included skepticism from me as well, and I continue to have that skepticism. Rather than dive into that discussion though, I think it’s more important and productive to examine how Intel could conceivably achieve that goal.

What Intel is Actually Predicting

It’s important to understand what Intel means when they made their prediction. First, they are making the prediction for the consumer market, not the slower moving SMB, government, or enterprise markets. Also, the prediction is not for the entire year, it is for the end of December, 2012. That is, 40% of consumer notebooks by the end of December 2012 would need to be Ultrabooks. This makes a huge difference when evaluating the probability of this actually occurring.

So what would it take for 40% of all consumer notebook sales to be Ultrabooks by the end of 2012?

Make Ultrabooks Look New, Relevant, and Sexy

Intel and their ecosystem need make Ultrabooks perceived as new, relevant and sexy. By relevant I mean making the direct connection between what the Ultrabook delivers and what the consumer thinks they need. Sexy, is, well sexy, like MacBook Airs. The ecosystem must make a connection with:

  • Thin and light– this is easier because Apple has blazed the trail and it is evident on the retail shelf.
  • Fast startup– this is somewhat straightforward and a communicated consumer pain point with Windows today
  • Secure– this is the most difficult in that it is always difficult to market a negative. It’s like life insurance; it sounds good, people say it’s important, then don’t buy it. I think Intel would be much more successful taking the same base technology and enabling exclusive consumer content or speeding up the on-line checkout or login process.
  • Performance- this is difficult to market in that no longer does performance have a comparable metric and chip makers have appeared to stop marketing why it is even important.
  • Convertibles- I am a big fan of future convertibles given the right design and OS. If OEMs can put together a classy, ~18mm design, it could very well motivate consumers to delay a tablet purchase. This will not work prior to Windows 8’s arrival, though because you really need Metro for good touch.

Probably the biggest impediment here is the “sexy” piece. Sexy is the “X” factor here. It’s cool to have an Apple MacBook Air. It isn’t cool yet to have an Ultrabook. A lot of that $300M UltraBook investment fund must pay for the Ultrabook positioning and re-positioning of anything Windows. This is a tough task, to say the least.

Steal Some Apple MacBook Air Market Share

Intel and their ecosystem, to hit the 40% target, will need to steal some of Apple’s market share. There is no way around this to achieve the 40% target unless they want to pull the dreaded “price lever”. Apple “owns” 90+% of the premium notebook market today and because Windows OEMs and Intel for that matter aren’t motivated to trash pricing now, they will need to steal some of Apple’s share. This will be a tough one, a real tough one particularly in that Intel shoots itself in the foot short-term by going aggressively after this one given they are inside every MacBook Air. So OEMs will need to take this one on their own, using Intel marketing funds as a weapon. This will be especially difficult given that Apple positioning isn’t going to be instantly erased by anything short term and Windows OEMs haven’t been able to penetrate this for years. Remember the Dell Adamo? Sexy, Windows 8 convertible designs could very well be the magic pill that could help steal share from Apple.

Lower Price Points

This is the last lever anyone wants to pull as it destroys positioning. Depending which data service you look at, the average consumer notebook ASP (average selling price) is between $600-700. This seems high, I know, when you look at what is being sold at local retailers, but remember that this includes on-line and Apple which has a higher ASP. Ultrabooks range from around $799 to $1,299 excluding Apple. This is well above the prices it would need to be to achieve the 40% goal. There are two ways to lower price; lower the cost or lower margins. I believe you will see a little bit of both.

As volumes increase, there will be immediate cost savings in expensive mechanicals like aluminum, plastic, and composites. Custom cooling solutions are very expensive required to cool thin chassis between 16-21mm in thickness. Tooling and design cost can be amortized over greater volumes to decrease the cost per unit. Intel Ivy Bridge, available in April 2012, will provide a shrink from 32nm to 22nm which would theoretically allow a lower price point at the same performance point, although I am sure Intel isn’t leading with that promise. Intel would much rather provide large marketing subsidies and pay NRE (non recurring engineering) costs to retailers and OEMS to design and promote the Ultrabook category. SSD is a tricky one to predict given spinning hard drive supply issues. Spinning hard drive price increases allow SSD makers to increase prices which doesn’t bode well for Ultrabook BOM costs in the short term.

Leverage Windows 8 Effect

The expected Windows 8 launch for the holiday of 2012 could help the Ultrabook cause on many fronts. First, it may give consumers a reason to consider buying a new laptop or notebook. I fully expect consumers to delay purchases and wait for Windows 8 to arrive. This could create a bubble in Q4 that, again, helps achieve the 40% goal.

Perceived Momentum

Finally, Ultrabooks need to get off to a solid start in 2012. Consumer influencers and the rest of the ecosystem needs to perceive UltraBooks as a success in 1H/2012 for them to “double-down” for 2H/2012. CES will be one tactic to do this, where I expect to see 100s of designs on display to demonstrate OEM acceptance to the press, analysts, and retail partners. Intel’s Ivy Bridge will give another boost in April, followed by the Windows 8 launch. Retailers cannot be stuck with excess inventory and cannot make drastic price cuts that would only deposition the category. Currently there is skepticism on the entire Ultrabook value proposition and the price points they can command so there is a lot of work to be done.

Will Ultrabooks Achieve the 40% Target by End of 2012

While this analysis is about what it would take to achieve the goal, I must weigh on what I think will happen. I like to bucket these kinds of things into “possible” and “probable”. I believe that if the Ultrabook ecosystem could accomplish everything outlined above, Ultrabooks could hit 40% of consumer notebook sales by the end of 2012. So it is possible, BUT, I don’t see it as probable, primarily due to the low price points that it will need to be hit. There just isn’t enough time to reposition a Windows notebook as premium and either raise price points of the Windows notebook category or steal Apple market share.