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Hold Off on Eulogy for PC Market: There's Some Life Left

Nov. 23, 2016
PC factory shipments are on track to decline for the fifth consecutive year. Still, more than $174 billion of PC hardware was sold last year, which is a big pool of money to chase even if PCs are a declining business.

There’s a glimmer of good news in the battered market for personal computers: The PC isn’t dead yet. 

I won’t mince words. Overall, the personal computer industry is never going to rebound. PCs are still useful to many, but they’re not the center of digital life anymore and users replace them infrequently. As a result, shipments of PCs from factories are on track to decline for the fifth consecutive year. 

Still, more than $174 billion of PC hardware was sold last year, which is a big pool of money to chase even if PCs are a declining business. Plus, there are even green shoots of growth for companies that have pinpointed pockets of increasing PC demand among business professionals, creative types and schools. PC industry participants are also helping themselves by ditching bad habits of chasing any sale they can find.

Above all, the PC industry has become a barbell. There’s promise in selling high-end and low-priced models, with a vast swath of declining demand in the middle. 

Credit Microsoft Corp., chipmaker Intel Corp. and large PC hardware manufacturers such as HP Inc. for reshaping the industry by coming up with fresh ideas about what a computer should be. New models including touch screen PCs and computers like Microsoft’s Surface that double as tablets appeal to people who are willing to pay up for PCs, such as corporate road warriors, video game die-hards and fans of virtual reality games.

The PCs with high-end features and price tags to match have held up better that the overall PC market this year. Sales of computers priced $1,000 and more will inch up 1.5% this year, research firm IDC estimates. That growth rate isn’t much, but it is more impressive considering that unit sales of Apple Inc.’s Mac computers — a big chunk of the high-priced PC market — declined 10% in the year ended in September.

Catering to the high end has been a windfall to both Microsoft and Apple. Microsoft generated more than $4.1 billion in revenue in its last fiscal year from its Surface lineup. That is new revenue for the software giant, which started its own line of PCs in 2012. Microsoft also recently introduced the Surface Studio, an innovative $3,000-and-up desktop computer aimed at the creative types that have long been Apple’s customer base.

And although Mac sales have declined in the last year as Apple’s computer models grew long in the tooth, Macs still generated $22.8 billion in revenue in the last 12 months. That is more than the annual revenue of all but 117 public companies in the U.S. The company also recently rolled out a new line of the high-end Macbook Pro computers at higher prices. As Apple has done with its iPhone business, if the company has trouble increasing Mac sales, at least it can wring more money from each one. 

The even bigger PC success story can be found at the low end of the market. IDC estimates unit sales of PCs priced below $300 — including Alphabet Inc.’s stripped down Chromebook laptops — will increase 7% this year.

Quietly, the five-year-old Chromebook line has made perhaps the biggest impact of any computer device in years. Chromebooks will account for 15% of all PC sales in the U.S., according to IDC’s 2016 forecast, and are becoming a common sight in schools. In some cases, Chromebooks are expanding the PC market as schools that perhaps had a dozen or so PCs for a computer lab are buying many more machines for use in each classroom. 

PC makers also figured out how to manage their business in a declining market. HP stopped trying to sell every PC it could and focused on machines it can sell profitably. As a result, HP’s operating margin in the PC business was 4.3% or better in each of the last two quarters — the company’s best operating margin in four years.

Pretax margins for Lenovo Group Ltd.’s PC business have also inched up this year, to 5.2%. Yes, having just $4 or $5 left over from every $100 in PC sales is not wonderful. But it shows the PC industry’s two top sellers are willing to sacrifice sales to ensure profits. 

Don’t call this a PC comeback. But the signs of life in the top and bottom of the market are good for Intel, Microsoft, PC hardware makers and companies that make PC hard drives such as Western Digital Corp. and Seagate Technology PLC. Personal computers may not matter as much as they used to. But they still matter, and money remains to be made for companies that play smart in an eroding industry. 

By Shira Ovide

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