PC Economics

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It’s clear, both in the press and in the experience of our own lives, that we now live in a multi-screen world. Most users today access their online lives via at least two devices (smartphone, laptop/PC), and many add a tablet as well, to become three-screen users. With the increasing penetration of smart TVs, it’s likely that many people will become regular users of four different kinds of devices.

There are a handful of key questions that come out of this multi-screen movement: what role will each device play, in terms of creating vs. consuming content? Will applications span all screens, or will specific apps be tailored to each device type? How will information be appropriately synched and displayed across devices? And what does this entire movement mean to data and security management, and the support requirements for corporate IT?

These are all important issues, and we’ll likely tackle at least some of them in the future. For today, though, I want to look at something more fundamental — the economics of building and delivering PCs.

At first blush, we might assume that PC suppliers would occupy the "big chair" at the device table. Of the four device types mentioned above, only PCs are fully-functional as both creation and consumption devices; tablets, phones and TVs aren’t likely to be adequate platforms for programming in Excel or creating sophisticated web interfaces.

It’s clear, though, that the PC industry is not fundamentally healthy. The multi-screen phenomenon has contributed to this: research has shown that when it is time to invest in a device, buyers are often opting to acquire a new smartphone or a first tablet rather than upgrade their existing PC. In reality, a new PC delivers new functionality — more storage, better reliability and performance, enhanced displays — but the other client form factors deliver more obvious and compelling new functionality, such as the ability to access information from anywhere, to respond instantly, to be connected in new and different ways to new and different information sources through new and different apps. It’s hard for PC vendors to appeal to buyers looking for something new and cool when what’s new and cool is the latest smartphone or tablet, and the apps that run on these devices. It’s hard as well for PC vendors to insinuate themselves into corporate purchase priorities, when the corporate budget has to stretch to acquiring (or under a BYOD scenario, at least supporting and securing) alternate screens. As a result, we’re seeing buyers acquiring PCs mainly to replace end-of-life units rather than as a means of delivering net-new functionality. This results in elongated PC refresh cycles — and elongated refresh cycles are a huge problem for an industry where nearly every potential customer already has a device.

An extended interruption in the refresh cycle has a chilling effect on the PC industry as a whole. We saw this during the Great Recession, as buyers avoided purchases as long as they could — but now, with sales of smartphones and tablets booming and smart TVs poised for growth, PC vendor senior management (and their shareholders) are looking for a post-recession bounce. The result? Many motivated sellers chasing relatively few buyers. And the result of that is predictable: falling prices and profitability. Close to home, this results in great deals for customers but no profit for suppliers; I have it on good authority that few (if any) PC manufacturers were able to sell PCs profitably during government year-end in March, which — since March is the busiest month of the Canadian IT year — means depressed margins across the PC vendor community.

Not that there’s a lot of fat to be trimmed in PC margins. In their most recent reports, the three largest PC vendors reported the following:

  • HP: $1.7 billion in operating margin against $34.7 billion in revenue, 5% margins.
  • Dell: Total PC revenue of $33.25 billion. Dell doesn’t split out operating margin by segment, but it’s probably safe to assume that PC margins weren’t substantially (if at all) above the company-wide net of 6%
  • Lenovo: Total 2012 PC sales of $26.6 billion. Like Dell, Lenovo doesn’t break out profitability by product, but given that PCs accounted for 90% of sales, it’s probably safe to assume that final PC margins were very close to the company’s overall net of 2%. This number comes with an asterisk, though. Lenovo does break out results by territory — and China, which represented 42% of revenue, drove 68% of profit before allocations for headquarters and other corporate overhead expenses. This means margins are very likely negative in some of Lenovo’s other territories.

So — we have a situation where PC margins (and overall sales) are under intense pressure. Is there a way to offset this? In other IT businesses, it’s possible to sell products at a loss, to generate downstream profits: printers work like this (with profit in the consumables), as do mobile phones (with profits in service plan subscriptions). With PCs, though, there’s no obvious means of driving post-sale margin to offset losses at the time of transaction. Even if there was customer demand for ongoing optimization and integration (and I suspect there isn’t a lot of that), it would accrue to resellers in SMBs, and likely be handled by internal IT operations in large accounts; in neither case would the vendors themselves realize the benefit of these add-ons.

So — what does this mean to the buyer/user community? In a nutshell, the current situation is untenable, and there are really only two future options: manufacturers stop making PCs because they can’t afford to continue to subsidize them, or profitability is restored to the product sales. It’s possible that some of this margin can come from lower component costs, but the current PC profitability squeeze hasn’t been driven by rising component costs — it’s been a result of falling PC prices. In our opinion, buyers should prepare for higher per-unit costs in the future, if they want to continue to support PCs as one of the "screens" used by their organizations.

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