Why Is The PC Market Really Failing?

by: StockBaller

The declining Personal Computer (PC) market has been a hot topic lately, as market research firm IDC reported that Q1 2013 unit sales have apparently fallen about 13.9% from the same period last year. Given a decline like this, it's not surprising to see that many major tech and PC manufacturers have been facing difficulties:

  • Market leader Hewlett-Packard Company (NYSE:HPQ) is the clearest example, as it saw a 23.7% year-over-year drop in worldwide shipments of PCs in Q1 2013.
  • Dell (DELL) recently cut its operating income projection from $3.7 billion to $3 billion. A recent buyout proposal from Blackstone Group was withdrawn due to Dell's declining numbers and concern over the PC market slump. The stock consequently fell around 4%.
  • International Business Machines (NYSE:IBM) fell well short of its Q1 2013 revenue forecast of $24.65 billion, reporting revenue of only $23.4 billion. IBM took a steep dip on earnings day, dropping over 8%.
  • Intel (NASDAQ:INTC) PC Client Group revenue for Q1 2013 came in at $8.0 billion, down 6.6% sequentially and down 6% year-over-year.
  • Advanced Micro Devices (NYSE:AMD) had a net loss of $94 million in Q1 2013, with a 38% decrease year-over-year in its Computing Solutions segment.

I believe that the decline of the PC market can be attributed to the emergence of new tablets and smartphones (the primary reason), longer PC upgrade cycles and Windows 8.

The Impact of Tablets and Smartphones

In the past few years, we've seen a huge change as smartphones and tablets have been developed to such a point that they can perform all the tasks a PC can perform. Users can play games, watch movies, work, use the internet and communicate all on their phone or tablet. The new emergence of cheap tablets has been primarily facilitated by Apple (NASDAQ:AAPL) with its iPad device, but there are numerous other manufacturers now competing in the same space, including Google (NASDAQ:GOOG) with its Nexus tablet. And feature-rich smartphones from manufacturers such as BlackBerry (NASDAQ:BBRY) and Nokia (NYSE:NOK) are also plentiful.

The main competitive advantage tablets and many smartphones have over traditional PCs, apart from their convenience and portability, is their lower price. Buying a new computer with recent hardware is a serious expense that can run well upwards of $1,000, whereas cheap tablets or smartphones run well below $500. PCs remain highly superior for serious gamers, but for regular users, it tends to make more sense to upgrade by purchasing a tablet as opposed to a new PC.

Longer Upgrade Cycles For PCs

Speaking of upgrading, we appear to have reached a point where PCs have advanced to a stage where it is not necessary to upgrade them as often. Today, even a computer several years old running an older version of Windows will be fully compatible with most software a user may need, as now developers tend to make software with significant backwards capabilities. PC users often only need to upgrade their hardware if they wish to play the latest computer games on the highest settings, and that represents a fraction of the overall market. By comparison, it seems that many users will upgrade their smartphones and tablets far more frequently as these technologies continue to grow much faster. It is very possible that in a few years we could also see the smartphone and tablet market begin to mature and upgrades become less common, just as with the PC market now.

Windows 8

The latest operating system from Microsoft (NASDAQ:MSFT), Windows 8, has been heavily criticized. Windows 8 is substantially different from Windows 7, as it uses a completely new interface (rather than a normal desktop start screen, it has tiles, and there's no start button) that definitely seems to be more suitable for tablet devices than PCs. Numerous tablets use Windows 8, and perhaps Windows 8 is an excellent operating system for those devices. But it's certainly not helping PC sales.

Will The PC Market Continue To Fall?

It's quite possible that PC sales will continue to decline for the remainder of 2013, but even with that said, the fact remains that PCs are still essential for the majority of people, and I don't envision the "death of PCs" (as some have predicted) happening anytime soon. People are still using their PCs for important tasks and this will remain the case for years to come - it's just that now people are buying new PCs less often.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.