With both the pervasive role that smart phones are increasingly playing in our lives, and the advent of the iPad (AAPL)and the slew of me-too tablets in the making, the future of the PC -- be it desktops or laptops -- has been in question. The assumption is that these new devices might simply replace the PC. Yet, in practice all these technologies seem rather complementary and accretive to each other, as opposed of fully interchangeable. Combined, they’ve have just multiplied the type of activities and places in which our ability to communicate and have access to information has been enhanced.
What we are seeing is an increasingly multi-modal consumer, who wields a different gadget depending on the occasion and the task at hand. In that sense, the time spent on the PC may have been reduced: indeed, I don’t need to wait anymore until I am in front of my computer to find out what’s going on with my friends or to buy a book at Amazon.com. Yet, the PC still is -- and I project will continue to be -- the preferred technology for some of the most involved activities that have been transferred to the virtual realm: research, shopping, number-crunching, artistic endeavors, etc.
The weakness of the PC industry lays not so much in the risk of the PC becoming obsolete, but in the risk of the current manufacturers making the PC obsolete due to an outdated business model and their unwillingness to completely rethink the PC category.
Allow me explain: for more than two decades now, PC companies have relied on a replacement model to keep the market thriving. Their bet is that as technology advances, the development of faster, flashier PCs will compel consumers and corporations alike to upgrade, ditching their old computers and buying new ones. However, this model is not working that well anymore. Consumers are not willing to upgrade their computers as frequently as before. The replacement cycle has therefore lengthened. The industry, in an effort to artificially spike the demand, has kept slashing prices, forcing themselves into razor-thin margins and undermining the profitability of the category.
Yet, buying a new PC is still a hefty investment, and consumers think it twice before embarking into a new device. Referring to one of my recent articles, “Cisco, Netgear and the Desire for 'More,'” I addressed one of the reasons behind the consumers’ reluctance to upgrade: very simply, a lack of understanding of what I am going to get. Faced with a plethora of options, all of them described in more or less the same way, and characterized by technicalities that only a few chosen truly understand, most consumers simply shy away of the decision. In addition, the far more conscious consumer of today simply resists the idea that a perfectly fine (yet slow, buggy and not that cool looking) computer needs to be replaced. It seems wasteful and unfair based on the heavy investment he had to fork just a few years before.
As a marketing strategist, it is my job to understand what consumers value, how they think, and what motivates them, and to interweave those insights to get companies to look at their markets with new eyes in order to uncover untapped opportunities. There is always a better way to meet what the consumer considers important and relevant. However, what I’ve found is that, in many cases, the companies themselves are their own main obstacle in achieving this. In yet another article of mine, “Apple vs. Microsoft: Embrace the Zeitgeist,” I indicate that:
Most companies invest a tremendous amount of resources talking to consumers, gathering insights, trying to understand what is important for them. All too often, though, those insights are unconsciously sifted through previously established paradigms. These paradigms are based on the knowledge and understanding accumulated by a company or industry through the years: what worked or what didn’t in the past, previous understanding of the consumers and products, assumptions built on experience and so on. Paradigms die hard.
The world changes around us, but we have a tendency to cling to old paradigms. More often than not, new insights are either forced to fit the old paradigms or simply, discarded as outliers. Even when new insights are gathered and understood, the second sin most companies go through is to stubbornly try to, once again, force an existing solution into meeting the new insight. Most companies develop an introspective understanding of the world, of their industry and of their own capabilities, and end up believing it as the absolute Truth. That is, we tend to fall in love with ourselves and end up drinking our own Kool Aid.
I believe that both Hewlett-Packard (HPQ) and Dell (DELL) are in this camp. Hewlett-Packard has the advantage over Dell of being a more diversified and dynamic company; HPQ has already announced they are working on their own tablet, and I am sure Dell is not far behind. But in terms of the PC business, both companies are playing by the same rules, and sticking to the same old paradigms. Could anyone of them change the rules of the game? I believe so. Either one of these companies could revolutionize the industry, reactivate the category and consolidate absolute leadership by completely changing the prevailing business model.
Furthermore, I believe this new business model can get its cue from a tiny segment of the population: the PC DIYers. These are guys who have not bought a branded PC in a long time. They ‘build’ their own computers. What is interesting is that, in doing that, they end up investing more money behind their ‘rigs’ than if they participated in the conventional replacement cycle. Why? Back to the “Cisco, Netgear and the Desire for 'More'” article:
One of the most powerful emotional drivers ruling our consumer behavior is, simply, our desire for ‘more’. More what? Anything: better, faster, cheaper. We are helplessly compelled to want whatever we perceive is an improvement over what we already have. We want it (emotional): we can’t always justify it… or afford it (rational). Yet, this is the drive that makes us ditch perfectly fine, working cell phones, TV sets, jeans, sofas, cars to go and get the shiny new one. If emotionally we perceive there is more to be had, and rationally we can justify it, then we have a purchase.
The ability to make frequent and meaningful upgrades to their computers activates in these consumers the desire for ‘more.’ And the usually affordable character of such upgrades makes it easy for them to rationally justify the purchase. This small group of consumers actually supports a very active, thriving market in computer components.The little known side of it is that building your own PC hasn’t been a highly technical endeavor for a long time. PCs have been modular devices for years, where components are just plugged together. It is just an assembly process; not very user friendly, but not difficult. Barely a screwdriver is required. Yet, it remains taboo for most of us. Some people might venture into making a few upgrades to their PCs (adding a hard drive or upgrading the memory), but for the vast majority of consumers, computers are black boxes they are scare to even open.
Stuck in their old paradigms, PC companies have purposefully kept the myth intact, lest consumers learn how to upgrade their machines and trash their business model.There is an opportunity to be grabbed in turning what has been so far considered a threat into the foundation of the new business model.
As I indicated, PCs have been modular devices for years. Either Dell of Hewlett-Packard could seize leadership by leveraging this modularity and turning it into a unique proposition: developing a PC architecture specifically designed on the basis of easily upgradeable ‘plug & play’ components. A simple case with multiple docking bays in which cassette-like components are just effortlessly inserted and plugged in. Want a larger hard drive? Withdraw the old one and insert a new one. Faster graphics? Same thing: rather than graphic cards, arrange the necessary circuitry in an insertable enclosure. Even the mother board should be easily upgradeable.
This business model is not about selling complete PCs anymore: it is about selling proprietary upgrade components. As the cash layout for the consumer is smaller, both turnover and margins can see significant increases. When you think about it, selling a PC is basically selling a bundle of components. The current business model relies on the consumer deciding to buy the next complete ‘bundle.’ How many more components can be sold if they are ‘unbundled?’ How much easier would it be to activate the consumers’ desire for ‘more’ if they could focus on easier to understand, desirable improvements instead of -- paraphrasing -- having to buy the bathwater with the baby? How much more quickly would a consumer go over several upgrade cycles if it could be done one component at a time?
Of course, I am sure that there are some technical challenges associated to such a proposition, but none of them insurmountable. If and when I see one of these companies applying a consumer-friendly model like this one that will be my signal to load up on their stock. Until then, the strategic alternatives are not too bright: continue slashing at each other for the crumbs of a slow-growth PC business, or try to dance to Apple’s tune in the mobility market.
Disclosure: Author long HPQ
