The Decline of the PC: Computers No Longer a Growth Industry

In May, 2006 we noted that things were tough in the PC industry, with the HP/DELL/Lenovo troika competing heavily for market share at the expense of profitability.

Dell (DELL) has cut its earnings estimates for the first quarter, saying the shortfall “was driven primarily by pricing decisions in the second half of the quarter.” With prices falling at a faster rate than unit sales are growing, it is tough to show any gains on the top line.

Over the course of the year, that thesis played out in large scale.

Global PC shipments grow, but revenue remains flat

Shipments of desktops, notebooks and servers with processors from Intel and Advanced Micro Devices grew by about 10 percent worldwide in 2006, according to figures released Wednesday from research firm Gartner. During the calendar year, 239.4 million PCs left factories.For the year, revenue generated from worldwide PC sales across the industry, however, remained flat at $201.1 billion, according to the firm’s early estimate. It doesn’t appear that 2007 will bring much change. PC shipments will go up by 9.9 percent, Gartner predicts, but revenue will only climb to $201.3 billion.

“It is going to be a tough year,” said Charles Smulders, an analyst for Gartner.

The crazy thing is, though, that 2006 wasn’t especially brutal for PC pricing. While price drops were generally in the low double digits, looking back through history it was one of the slowest paces of price declines on record.

Now the question boils down to several competing factors to see whether the price environment will continue to be merely bad, or whether it will actually get worse. First and foremost among these is whether Windows Vista will truly result in a massive hardware upgrade cycle, and whether it will begin as quickly as customer pre-orders are indicating.

Secondly is whether selling prices are already so low that demand has become completely inelastic (insensitive to price cuts.) With systems now retailing for well under $1,000 this may be the case. Furthermore, it may be the catalyst behind the power shift from DELL to Hewlett Packard. As we discussed in May 2006:

It may not be that people care less about customization but rather that the now super-low prices of PCs has turned the industry on its head in terms of efficiency. In the past, DELL’s model was more efficient because declining prices meant that having a low inventory and no retail markup carried a large enough advantage to offset the cost of shipping the PC. Now, with the PC selling for $500 rather than $1,500 the shipping costs per unit are much higher and may actually make bulk shipments to retailers more cost effective than individual shipments to buyers.

What is clear, though, is that PCs are no longer a growth industry, and if the competition continues to revolve around price, it may soon be a business in permanent decline from a revenue perspective. No wonder Apple (AAPL) took the “computer” out of its name.

Comments

[Tommo_UK]

"What is clear, though, is that PCs are no longer a growth industry" - unless you're Apple, in which case your "PC" sales are still growing by about 30%. Sounds like a "growth industry" to me.

[Malkiel]

As an experienced computer user who shopped for and bought a laptop in the 06 holiday season one thing I noticed was how few computers out there in all price ranges were adequately configured to upgrade to Vista. I think in the 07 Fall school-and-holiday cycle a wave of computer buying will happen as Vista becomes understood and users see the need to upgrade their hardware. Whichever companies catch that wave with the right hardware on offer should do well, at least in terms of sales.

I also sense a new opportunity for any software company offering up a sleek, packaged Linux OS that can keep older pc's in the game, as many of the computers which must be replaced in the Vista upgrade cycle are still nicely configured for standard uses if they aren't burdened with a bloated OS. (oops! can't find an objective term to describe that aspect of Windows; every version since '95 qualifies for the "b" word...). I would love to see Apple break out of their boutique mentality and configure their OS for pc's to challenge MS in the software upgrade marketplace...

[WilliamTrent]

3% of the industry growing at 30% contributes 1% to overall PC "industry" growth. While Apple is a growth company, that says nothing about the PC industry.

We'll see in the Fall whether PC companies can command any extra profits from Vista-ready PCs.

[Tommo_UK]

William, sorry; I was being dry with my remarks. Of course the PC industry isn't a growth industry any more. Apple is a growth company, however. There's isn't another mega-cap like Apple: executing to perfection, growing earnings 30-40% YoY, innovating, and trouncing the competition.

Vista won't be a big growth driver IMO. There's just no buzz about it. It will drive sales, but not to the degree many are hoping.

[WilliamTrent]

I think it will drive sales even more than people are expecting, but not for a while. In the meantime, the time to invest will be when the Vista bulls throw in the towel. Look for MSM stories on the Vista failure, then buy.

[Tommo_UK]

William, nice contrarian thinking :) .. but I'm not sure there are truly that many Vista bulls around though - just a few very vocal ones. I don't see Vista driving growth. Sales, perhaps, but not any real out-of-the-ordinary growth. I see Mac sales a chief beneficiary of the Vista upgrade cycle, because with the change of environment from XP to Vista and with Macs running OSX, Vista, and XP, many buyers wanting to upgrade their PC will just go Mac instead, knowing they can run the best of all three OSs on the one machine. This will be even more true once OS X Leopard is out in a few months and Apple step up Mac advertising.

[dana maryla]

f you look at what happened in the US between the 3rd and 4th quarters in computer sales, you do see that the Major Trend was for Dell to lose "units shipped"..and other vendors to gain by taking their share.


These comments are based onGartner data for US sales quareter by quarter, 3rd vs 4th posted on one of the blogs last week [I'm sure you know which]--perhaps MacDailyNews....




More precisely [in thousands] Dell lost 1,042. Where did this go?

Well, of the 1042 units HP picked up 566 units.

Gateway gained none, itself losing 7 units.

Toshiba picked up 101 units.

While little Apple picked up 194 of the units shipped.

The difference [1042 & 7 = 1049 LOST minus 566 minus 101 minus 194 =871 GAINED == approx 170....indicates the cumulative industry loss in PC sales quarter over quarter.

So, HP, with it's already large units sales, picked up a bit more than 50% of the Dell loss, while little Apple picked up about 20% of this Dell drop in sales. With Toshibaapparently doing well, and picking up 10% of the Dell drop.

How is this a pessimistic picture? What if Apple were to continually take 20% of the drop in Dell [or other vendors shipments] each quarter?
Both Apple and HP are gobbling up Dell's drop off, but HP is gobbling up more [50%] while Apple is picking up 20%. However note that Apple's quarterly pickup is 40% of the much larger HP's pickup at Dell's expense. This is pretty stunning, I think!!!!!

[dana maryla]

An Addedum to my comment above:

YOu can see from your world wide figures the same trend as in USA. ONLY Dell has gone down year over year...which with it's large share of market has skewed results towards neutral or slowgrowth. On the contrary, worldwide you can see HP, Toshiba, and even Acer with double digit growth in the 20% and above range. Similarly in the USA figures I cites in my comment above, ONLY DELL has declined, with Apple, Toshiba and HP all gaining handsomely year over the year.

The question is NOT the PC industry, but a closer look at what Dell [alone among manufacturers in decline[ is doing wrong and what the others,perhaps indicated by Apple and HP, are doing right. This 'trend' of which you speak, according to your own numbers at any rate, is not a "PC thng" but a "DELL thing".

[WilliamTrent]

Total shipments for the industry were up 7.4%, or slightly above nominal GDP. That is an "industry," not a "growth industry."

And as the pricing chart (from the Bureau of Labor Statistics industry PPI data) shows, prices have been falling by more than 10%. Therefore, 7.4% unit growth less 10% price declines means that revenue is falling, not growing at all.

It is important not to mix up prices and units when discussing the industry's growth or lack thereof.

[Tom B]

It's a curve, as I see it. PC's get more expensive (in terms of TCO, anyway) with the ever-increasing security and complexity issues. They may even be destined to get more expensive in sticker price, now, with Vista's steep-ish system requirements. Macs have gone DOWN in in TCO since OS X. Is this a sustainable situation?


I think at some point, people are going to say "What the hell?" and take the Mac plunge.