The Danger of the $200 PC

There have been rumors of the return to netbook pricing in the PC market. We believe this could have an irreversible impact on overall PC prices. When we study the PC market, we see a high degree of health in the higher end segments of the market. Companies like Apple and other vendors who have legitimate premium offerings have secured their slice of the PC pie with a sustainable hardware strategy. Our concern on the Windows front is, if the price of Windows PCs drop significantly, those price points will become the “new normals” and eliminate any real chance of premium offerings by other Windows PC vendors. Currently, the ASP of notebooks is approximately $700 and desktops approximately $550. But those high ASPs are because of Apple’s Macs. The ASP of a strictly Windows PC is about $430 which is about as low as a full featured Windows PC has ever been (excluding netbooks). At that price, it is already difficult for many Windows OEMs to make much money on hardware. They are all currently looking for more software, services, and accessories revenue as a point of emphasis.

Competing with Apple is hard enough for vendors in the Windows ecosystem. A significant drop of ASP will likely eliminate any chance of premium offerings by them. There will still be an enthusiast Windows community but that community is already quite small. The build-it-yourself PC community and the hard core PC gaming category, while extremely healthy, are still too small to sustain the ASPs of the entire Windows PC market. So as of right now, this is a look forward forecast of the ASPs of certain categories.

Screen Shot 2014-12-11 at 9.44.28 PM

However, given this article I posted a few days ago on low cost tablets, I’m already due to update my outlook for tablet ASPs in 2015. Should the notebook and desktop space truly become a race to the bottom, then I will have to adjust the 2015 ASPs of notebooks and possibly desktops to trend more into the negative than I think is healthy for the category.

Part of the drive to bring down the ASPs of PCs is to kick start the broader upgrade cycle in consumer markets and perhaps compete more with tablets in the entry level PC space (first time PC/tablet buyers). There is some sound logic to this. However, with “good enough” computing established in these markets, the concern would be that nearly the whole market would gravitate to these lower cost PCs and cause a sweeping shift in price points to the lower end where margins will be even further squeezed for the OEMs. Overall, our concern is the destruction of the “value and premium” segments of the market with “good enough” options being offered in the <$400 PC market.

Using my viewpoint of what happens with low cost tablets in consumer markets, I feel it would be smarter if vendors left the bottom to those tablets and focused on features and functions that will remain “valued” by end users. I can see a scenario where consumers start to gravitate to desktops in their homes instead of notebooks. They can use the tablet or their smartphone as their mobile PC and pair it with a desktop for their fixed PC usage. Due to the lengthy refresh rates, our research indicates consumers would spend more on these PCs because they intend to hold onto them because they want to them last longer than previous upgrade cycles. Those who need notebooks because they are traveling or are mobile workers will still utilize and spend on the product because of its value to them from a productivity standpoint. Bottom line, I believe there is still money to be made in PC hardware if Microsoft and the vendors can avoid letting certain players collapse the ASP of the PC category. Should the race to the bottom happen, even those who would pay more because of the intrinsic value the PC provides will no longer have to since they can get the same features as mid and even high end PCs at rock bottom prices.

Eventually, I can see the PC market going one of two ways. Either it becomes a race to the bottom and only a few current vendors are left standing or value can remain in the category. Ultimately, it is up to Microsoft and the Windows OEMs to decide which future they want.

Published by

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

40 thoughts on “The Danger of the $200 PC”

  1. In analysing the PC market, it is tempting to extrapolate past trends in usage and price.

    However, if you stand back and think about PCs from a consumer angle then they have some serious drawbacks: 1) Windows needs one of the family members to act as the administrator and deal with unexpected hickups, virusscanners, etc., 2) the software is complex and expensive compared to mobile apps, 3) desktops take up much space, which is not fine in many markets, 4) unlike phones/tablets, PCs are not always on which causes problems with backlogs of software/virus updates that accumulate in a few weeks of non-use.

    In short, PCs have many hidden costs in terms of admin, complexity, software, space and inconvenience. The survival of the consumer PC market probably depends more on the trajectory of those hidden costs than the ASP.

    1. Very much so. I think it’s a classic monopoly effect: MS was so dominant no competition could emerge, and MS itself had very little incentive to innovate and break backwards compatibility. We ended up with a stagnating and complex OS designed for Entreprise in our homes.
      Which is why it’s sad to see MS backtracking on Metro. They haven’t even tried to fix it, ie give it goods apps starting with MS’s own, make sure you never-ever see the desktop, and focus on the user experience and transitioning users’ skills, not ticking checkboxes for management. I think a fully Metro-ized Windows had the potential to be as is to use as Android or iOS; now it seems we’re back to needing an admin.

      1. Here’s the thing though…on a desktop OS anyone could have written a Windows Shell (which is all that Metro really is), and they still can. If there was a “there, there” would not Metro been successful? Still, dual mode (or nth mode) is possible, because it’s not forbidden.

        The desktop is still far more powerful and convenient for desktop applications, so why “metro”?

        1. 100% correct Klahanas. Metro is just a shell on Windows just like how Windows was just a shell on DOS back in the 1990’s. What happened is that Microsoft got scared and saw the success of the iPad, iPhone and Android and did not want to get left behind. They had to try and move the focus back to the Windows desktop OS. They where hoping to do is to get developers to develop Metro apps because the market size of Windows would mean that they would have a market of millions of users.

          Of course it did not work out that way as developers are already busy making iOS, Android and web apps all on their MacBook Pro’s and iMac’s. They where late to the party and really had no chance. Of course Microsoft has a way of sticking it out as they have done with XBox as they still are making plenty of money that they can use to keep Metro alive but it does look like Metro really will end up being only viable on Windows Phones that sell on the low end of the market.

        2. If you recall a point I made, not sure which insider post, but I pointed out how the touch / metro concept was based on a fundamentally flawed concept that people want tablets to replace notebooks?

          MS is back tracking because they are realizing that stationary computing is different than mobile computing and needs to have purpose built OS and apps.

          I can’t even begin to tell you how may arguments I had with MS execs on this very topic. They told me I was wrong. Now they admit I was right. Windows 10 will correct many of these issues.

          Since my firms heritage is PC analysis, there is SO MUCH more I can say about all of this. I could present on the issues of the PC and where it goes literally all day. But the dynamics have shifted and that is what any good analysis needs to point out.

          So more to be said and I have a lot more I’ll write about on the dynamics of the PC industry.

          1. But, Metro is not a bad Desktop interface, on top of being a good Mobile one. The issue was not the concept, but the execution: terrible discoverability and learning curve (no hot zone/scrolling hints, no Back button…), terrible apps (again, Metro Skype wouldn’t even ring on an incoming call), gaping holes that threw you back to Desktop for anything…
            The basic UI (Live Tiles, mono-app, even the Charms bar if only users knew where it is), the safe AppStore + updates, the dev environment… are good. 8.1 with its Exit button are even better. I actually dread having to put my 80yo parents back on the Desktop if Win10 forces that.

          2. I agree. This can, and will, be done. What I always loved about PC’s is their flexibility. That’s what truly makes them “personal”.

          3. I might have missed it in the above comments, or possibly past comments but can you briefly explain the PC’s flexibility that is needed; not necessarily wanted.

            I just want to understand your position clearly.

          4. It’s precisely the “wanted”, which includes the “needed” that is the point. But to answer your question, it’s:

            a) the ever evolving number of tasks it can do.
            b) the ability to write (or pay someone to write) programs that are specific to your needs.
            c) the independent ability to freely sell or give away those programs with other’s.
            d) the maintainability and upgradability to be able to use emerging technologies as they appear.

            To name a few…

          5. “how the touch / metro concept was based on a fundamentally flawed concept that people want tablets to replace notebooks?”
            I agree, but a notebook is really a functional superset of a tablet, and there’s no technical reason it can do both. So, it’s there….

            I almost never have a qualm on the presence of features. If you like them, use them. If you don’t, then don’t. I have the opposite problem with artificial limitations though.

            Myself, I do use tablet mode for consumption on my SP3. I boot to desktop mode however.

          6. There are politics behind its existence from both Intel and Microsoft that I can’t get into.

            But at a base level, a lot of what you have seen has been an attempt to present the appearance of “performance” upgrades in order to drive a refresh cycle since everyone was hurting due to the slump.

            There is a market for the SP3 folks, it is just not that big but that is ok. I spend a lot of time studying how people use their PCs, and when you observe general purpose usage of the mass market, it becomes clear there is no mass market desire for a 2-1 and thus people want a fixed mode, and a mobile mode. The dual mode, does not get solved with 10 because Microsoft simply does not have a developer base that creates interesting apps for consumers. Many complex issues around this but the PC market is not growing and is shrinking, and segmenting.

            But my overall point remains that once value is gone from the PC segment and all we have is fully featured cheap PCs, there will be no recovering the value even though there exists hundreds of millions of people who I believe would pay the value price.

          7. Thanks for your insightful response. Where I may wish to differ with you, a little, is that there is innate value in any PC. Just because we’ve stalled on research in calculus (making this up) does not mean that the pre-existing work is useless. In fact, the PC, being as flexible as it is, has become ingrained in how we do things. Profits matter to all stakeholders to varying degrees.

          8. Your actually making my point. I agree there is value there and I agree that people will be willing to pay for it. The problem is once we go to $299 PCs with today’s technology (which was not what we had in Netbooks, which were not fully featured) then there will be no reason to buy a Windows PC for $699. Low end disruption plays out, and $299 is good enough even for the person who would have paid more. But there would be little reason to, unless they go Mac where there will still be value plays.

          9. Other than that the more expensive PC will be more capable. It will be able to do everything better. To your point, netbooks were fully fledged PC’s, they were just lousy PC’s. Really lousy PC’s. This time around will be better.

            When I purchase I always set a budget first, then buy the most PC, and most versatile PC that budget will permit. This has advantages as to options, features, and priorities. They more I spend, the less I need to prioritize.

          10. “When I purchase I always set a budget first, then buy the most PC, and most versatile PC that budget will permit.”

            I am guilty of not having a technology budget. I tend to buy the product that best fits my needs and most likely desire to own. I am definitely guilty of buying Apple’s technology first based on design. It’s definitely irrational behavior.

          11. “I am definitely guilty of buying Apple’s technology first based on design. It’s definitely irrational behavior.”
            If you say so.

          12. exactly the point, they will be better and $200. Which will essentially kill any reason to buy one for $699 or higher. This is my point.

          13. I agree with your point, to a point. It’s even more valid as we enter multi computer scenarios.

            Of course, the market for the $699 PC will be smaller, and need justification, but there will be a need for it. For instance, if the $1200 PC buys me more latitude in upgradability, I will choose it even over the $200 PC. Nothing is more expensive than, “It won’t run well”. This is true for whether it “runs Crysis”, does huge financial model spreadsheet, searches for mersenne primes, or manipulates complex images.

        3. Because it’s mostly not about power, it’s about ease of use and “accessibility” not in the sense of vision-impaired but in the sense of IT-impaired. I still sometimes get distress calls because an icon *moved* on the desktop !
          We both are in the probably 15% of users who like the desktop with its overlapping windows and multiple monitors/desktops, and can handle a PC. The remaining 85% couldn’t alt-tab their way out of a puddle.
          Metro, with its Live Tiles (well, the 2 of them that actually work, not even Skype Metro works), single-app screen (or 2, for the very skilled), automatic updates of every app (those from MS’s AppStore) and better defenses against viruses is exactly what the Doctor ordered, if only 1- the apps were there, 2- the apps that are there were any good, Live Tiles included, 3- you didn’t have to jump back into desktop for the most menial things, and 4- the UI had any kind of discoverability (at least the ability to make the Charms panel stick, or a visual reminder it exists)

          And it’s not only about the shell. You’ve got to have coordinated apps, a central shop w/updates, … it is, really, a brand new ecosystem.

          1. I don’t disagree. Remember when Windows was a graphical shell on top of DOS? GEM? Deskmate? Desqview, Topview?

          2. I often wonder if I ever needed more than Desqview: in the end, I run all my apps almost full screen, with windows barely staggered so I can click from app to app instead of using alt tab…

      2. So true! Microsoft saw the business market get saturated and saw green fields in consumers homes as a new market to sell Windows to. The problem is as you have stated and for those of us who do IT for a living know that Windows really was never designed to be easy and without the heavy hand of corporate IT can not run well.

        Windows is always going to need an admin. It is a byproduct of how it is sold, installed, upgraded, backed up and used.

        Of course the good news is that consumers do have a choice now and they can and will chose iPhones, iPads, Android devices and other devices that are much easier to use and do not come with all the drama of a standard desktop PC.

        1. All computers, even iOS based require an admin. Those however require as a stringent condition that the admin be Apple.

  2. I think your comment regarding a possible shift to desktops is accurate for a lot of consumers (except for students & road warriors). I know many (including myself) that have already transitioned to smartphone & iPad for mobile and couch use, and a desktop for complex computing tasks – no notebook is now required.

  3. If 90% of people are happy with a $200 PC then the remaining 10% of the market will suffer because the R&D budget for the sector will have to shrink by necessity. While cheap PCs help spread the development costs over more units, ultra cheap PCs do not help at all.

    For example, try to picture what would happen at Intel if they had to sell 90% of their x86 processors for under $40. The remaining 10% of customers would be left holding the bag for essentially all R&D spend; not great.

    1. You are correct, and it will happen to a degree. That’s but one reason that user serviceability and upgradability are important. It protects your purchase.

    2. Really depends on the total margin. Selling 100 millions CPUs at $40 with a margin of $20/ea generates $2b margin; selling 10 million CPUs at $400 with a margin of $360/ea generates $3.6b margin. Disproportionate, but not wholly one-sided.

  4. Do vendors really have a choice ? IBM left the low-end to clones, and had to exit the market a few years later, having lost 1- control of it and 2- economies of scale. Of the current market leaders, Dell, Lenovo, Acer come from decidedly low-end beginnings, and made it to the big leagues. Only HPaq chose to go downmarket and are still there to fight another round.
    I know, Apple are keeping high ASPs. But they’re a luxury/aspirational brand, I’m not sure their success can be duplicated at scale any more than Rolex’s or Mont Blanc’s can.

  5. Ben, do you think Microsoft would be prohibited by antitrust from dropping licensing and becoming the only Windows PC manufacturer? From a business model standpoint, it has worked well for Apple and seems like it would stabilize PC pricepoints.

    1. Apple is playing in the Consumer market; MS is playing in the Entreprise market. The rules are very different, Enterprise is used to a stacked hardware / OS / Apps / Service model, which if anything allows them to dilute vendor risk. Also, MS kicking OEMs out would send a clear message that the next move will be against Apps and Service firms, and that would start them on a massive push towards Linux, at least on the server side, possibly on the client side too (including Chrome OS or derivatives).

  6. I think at this point, it is worthwhile to take a step back and look at the history of the PC. In particular, I like to remind myself of what Steve Jobs said when he announced the Digital Hub strategy in 2001.

    We don’t think the PC is dying at all. We don’t think the PC is moving from the center at all. We think it’s evolving. Just like it has since it was invented in 1975 and ’76.

    Of course I understand that the world is a different place and that the environment may be even harsher for PCs than it was in 2001. My point is, I believe the future belongs to those who can find a bright spot, are energized, and are willing to invest in long term strategies. I believe that even in the most dire of straits, if there are any companies continuing to be genuinely enthusiastic, then someone will find a way out.

    I am therefore very curious about the recent excitement surrounding DELL, which Bob O’Donnell in particular has been reporting. Of course this is centered around the enterprise, but it’s hard for me to imagine consumer and enterprise going in completely opposite directions.

    Just my gut feeling, but I think that this time around, DELL might show us the way out (Apple it seems is too entrenched in it’s own ecosystem and vertical integration, and it’s getting harder for competitors to copy and benefit from their successes.) Their monitors look pretty awesome, for example, and they already have 5K.

    1. I’m glad that you mentioned Apple’s vertical integration and Dell’s 5K monitor in the same post.
      Apple put out a very expensive screen with a “free” (as per Ben Bajarin) commuter attached.

      The “free” computer is okay, it’s not that impressive, it’s quite average. It’s non-upgradable. For a $2500 computer, this is anathema. Worse! It can’t act as a monitor for another computer. This is even more inexcusable. The screen, however, is extraordinary. Overall, the Apple machine, at that price, would leave me “wanting”. The Dell screen is just that, a screen, unbundled and plays well with other’s. BTW, I read the price is going to be $2000, at shipping time. It’s still listed at $2500, which is ridiculous. 4K screens, with IPS panels are now reasonably priced. Where’s the iMac with that screen?

      What I’m getting at, is that PC manufacturers need to remind, and re-educate, their customers on the limitations of “vertically integrated systems”, by highlighting the benefits of modularly integrated systems. These are not for everybody, but it’s their biggest advantage. This is because it permits all it’s other advantages.

      1. “It’s non-upgradable. For a $2500 computer, for me, this is anathema.” – klahanas

        95% (or more) of computer user have no interest in upgrading their computers. You, and perhaps most of the readership of Techpinions, happen to be in the 5% that are interested in such things.

        1. I agree. But at the same time, what PC vendors need to do to stop falling into a price war is to pick their fights. They have to decide which markets they want to play in and provide the very best stuff for that market.

          If Dell chooses to target the few people who want to upgrade their computers, that’s perfectly fine. And since I think very few vendors have a 5K right now, they can command a good profit.

          It’s about differentiation, and a 5K screen is just that.

          What’s interesting is that about 5 years ago, PC monitors were all stuck at 24 inch max, and prices were dropping into the $200 range. I wanted something better to connect to my MacBook Pro, but nobody had a better screen at a reasonable price. I was willing to pay $500 but there were no products at all that offered better resolution at that price.

        2. From a business point of view I understand. I also understand that this is in Apple’s interest, and not necessarily their customer’s, whether the customer knows or even cares.

          The computer part will antiquate well before the display does, and it can’t be used just as a display. This is wasteful.

        3. That’s changing a bit. I used to never upgrade computers, including mine, because by the time 1 piece was obsolete, the rest of it was too: CPU and performance, CPU socket, RAM format, HDD interface, even expansion/graphics slot… Nowadays, things seem to be moving much more slowly on the internal front, what has been moving fast is the external interfaces, USB and Thunderbolt, and SSDs, which use the same interface as HDDs and shine even on older SATA-not-II -not-III interfaces.
          We’ve got a bunch of perfectly usable PCs that just need an SSD refresh and a USB card to get a new lease of life, maybe a stick of RAM for good measure though RAM requirements have not really evolved.
          I’ve upgraded quite a few PCs around me. Only my brother is stuck with a pre-SSD, pre-Thunderbolt iMac that is not user-upgradeable.

  7. ” I can see a scenario where consumers start to gravitate to desktops in
    their homes instead of notebooks. They can use the tablet or their
    smartphone as their mobile PC and pair it with a desktop for their fixed
    PC usage”

    Depends on what you’re calling a desktop. In my (admittedly limited) experience, there are a great many notebooks that spend nearly their entire lives sitting on a desk or table and not moving much, if at all. But I don’t think it’s that that the people who bought those notebooks were confused about how often they wanted to take their computer with them. I think it’s that they wanted something smaller and quieter and less obtrusive than a CPU box + keyboard/mouse + monitor. Even an Imac style AIO might have seemed too big/complicated to them. Laptops put everything you need in a single box with no wires to connect, that you can close and put out of the way when it’s not being used. That’s a major plus, and the downsides (smaller monitor/less performance) don’t really matter to 99% of home users.

    Which might explain why there seem to be two very different notebook markets — one chasing the Macbook Air (thin/light/expensive), the other seemingly stuck in the early 00’s (thick/heavy but quite inexpensive). Reviewers who pan those $500 laptops for being too big and heavy might be missing the point.

    There might be a market for “true AIO” computers — batteryless notebooks with integrated power supplies that are designed to be put-awayable rather than portable. But I think desktops per se are not going to make a comeback.

Leave a Reply

Your email address will not be published. Required fields are marked *