The Computer Struggles: Apple vs. the Industry

on October 29, 2014

Early Compaq

There was a time not that long ago that making a television was the pride of manufacturers. The U.S. industry was dominated by the likes of Motorola, RCA, and Magnavox (Philips). Today they have ceased to exist or have left the industry. The makers such as Sony want a way out, and the U.S business is dominated by Vizio and others who  have learned to sell at the bottom of the market.

Tech manufacturers have discovered that computer making is much like TV history. In the early days, there were lots of computer makers, but many of them failed attempts to make much money, from AT&T to Texas Instruments. Manufacturers such as Digital Equipment, Compaq, and Hewlett-Packard  consolidated. And now the successful survivors are forced to live off small margins in a commodity market.

Apple, of course, remains the huge exception. Though these days Apple relies on iPhones and iPads for the bulk of its sales, it sold $24 billion worth of Macs in fiscal 2014, an increase of 12% in a strongly shrinking industry. Unlike its competitors, Apple is not looking for an escape route.

The reason, of course, is that makers of PCs continue to live in an industry where the Microsoft software–particularly Windows and Office–are the same on everyone’s products. The manufactures other than Apple are forced to produce fundamentally products. The consumer market, which generates most of the volume, is a painful mess that is driving out many of the remaining competitors. Sony has left the business. Samsung, never a significant PC vendor in the U.S.,  is pulling both laptops and tablets out of the European market. LG is considering leaving the PC business. And HP, of course, has decided to dump its PC and printer makers into a startup called HP Inc. while its corporate storage and support business, Hewlett-Packard Enterprises, is keeping CEO Meg Whitman, most of the senior staff, and the bulk of the profits.

HP Stream 11 description.HP’s current PC competition is a tough business. The new Stream line of Windows notebooks is designed as a low-end offering and looks to be pretty well suited for customers who can get by fine with minimal service–when you realize minimal service includes a 1366×768 display, a 2.16 GHz processor and a 8.25 hour battery. The 11.6″ display (stats on the left) costs just $200, while a 13″ display costs $225. The laptop even includes a one-year subscription to Microsoft Office Personal with 1 TB of storage on Microsoft OneDrive cloud storage.

Not a bad deal at all for someone who has a decent connection setup and is using a laptop to pursue the internet, watch some video, do homework, and write the occasional letter. But not so great if you are a manufacturer trying to make a living. The prices of the Stream series suggests that HP is not going to do much more than break even on the sales.

The facts suggest that consumer computer sales are struggling mightily. Acer and Asus, both Taiwan-based, are having a tough time. Dell, which has been increasing on corporate rather than consumer business, saw its profits in its end-user computing business fall 5 percent in the quarter than ended in August. Lenovo, which bought IBM’s PC products, is probably the healthiest competitor, with a 24% increase in profit in the quarter ended in July, but that was still only about 2% of the total revenue for its computer and phone business.

Charles Arthur in The Guardian, argues that the Windows PC business is a value trap:

The value trap is deep, though. Because Windows and its apps are easily moved from one PC to another (which is a huge benefit to the consumer), it’s almost impossible for hardware makers to differentiate themselves from rivals. In the past, their best hope has been to encourage repeat buying through having extra hardware features; that’s what some are trying to do with touchscreen laptops and desktops now. But there’s little sign that buyers are enthusiastic about those, preferring instead to buy offerings that are just a little cheaper.

That means there is always downward pressure on both prices and margins, while the only way to make useful profits is to be able to build at scale.

John Kirk writes about how well Apple is doing in “Apple Takes Its Place in the Post-PC World.” Apple’s condition is dramatically different for the simple reason that only Apple makes Macs and only Apple makes money from the operating system and other software, whether included or sold at extra charge. At the same time that it has driven down Microsoft prices. And by offering a relatively limited line of Macs (especially compared to the offering of, say, HP) and offers only top-shelf equipment at top-line prices, Apple enjoys healthy profit margins.

There doesn’t seem to be an escape for the makers of Windows computers, or phones for that matter. The last real attempt by competition was the HP attempt to build on the webOS it acquired by buying Palm. Unfortunately, it has just brought out a couple of phones and a hurried, badly rushed tablet when HP CEO Léo Apotheker killed it off as part of his move to make corporate services the heart of the company’s efforts. Except for a handful of Google-based Chromebooks, the computer business is all Microsoft–and nearly all of  the profit is going to Microsoft.