arghyle

William Trent at SeekingAlpha has a post on how the PC market is in decline. The general trends he points out are how sales are growing yet revenues are not and how growth of market share is decided upon by price cuts that are very damaging to a company’s bottom line.

As the writer points out, 2006 was not especially tough on PC pricing, but with competition based so much on price companies don’t have any choice but to keep starting prices low, just to get the PC in people’s homes. (Once there are they you can gouge them on support and the price of accessories). Interestingly, the price war between AMD and Intel this summer seemed like it should have helped lower costs, but this probably was not felt as much by larger companies who already had huge stockpiles of processors.

The article ends up with two important questions:

1) Will the move to Vista require as massive and quick a retooling as preorders would have us think?
2) Is the current price so low that demand for PCs is completely inelastic?

The article does not attempt to answere these (largely hypothetical) questions, but I’ll take a stab at it.

Personally, I don’t think the move to Vista will happen drastically. Judging from the move from W2K to XP, users will have about 3-5 years of support before they have to completely give up XP. I am expecting Microsoft’s legacy support to shorter since Vista is so late in arriving, but even if it is just 2-3 years, this is longer than the average consumer needs to own a PC. With sub-$1000 prices it is cheaper to just throw out a computer after two years than to pay someone to fix it or to possibly lose important data. Two years is probably on the quick side for most people, at least with their home PC, but at this point people will definitely be looking to upgrade. So the end result is that a quick move to Vista does not make sense to anyone- all the reviews have made it clear to consumers that the change is minimal, so why not ride out XP until your computer craps out?

As for PC demand being inelastic, this is a very interesting point. The PC market is too large and diverse to look upon as a whole, but we can assume that if someone has a computer right now, they see it as a valuable tool and never again would want to go without one. Seeing a computer as a necessity would imply that demand for it is inelastic, or that overall demand will be largely unaffected by the price. I would say this is a safe assumption for most PC users, though a drastic price growth would increase the incentive to prolong the life of computers and would prevent first time buyers as well as (and more importantly) people from buying second and third computers.

What is important to realize is that while the demand for PC is inelastic the demand for a certain brand is very elastic. Consumers and businesses have made it very clear to use that they don’t care whether they buy a Dell, an HP, or a Gateway, so long as it works and they can get the support they want. HP’s growth this year as well as Dell’s decline are evidence of how much price is a factor and how little brand loyalty people have. Little wonder when these companies are selling throw-away system’s with no future-proofing, that all look alike and have insanely expensive extended warranties, and when the main reason to buy one or another is if you get a free printer or not.

This means that price is still going to be the main factor for most buyers, but, during a short window, Vista compliancy/upgradability will be important as well. As interesting trend now is that the low price-per-unit means that shipping is relatively expensive and companies like Dell (with no brick-and-mortar locations) are being pinched by high shipping costs. Dell’s greatest strength has now become a weakness and they are suffering because of it. Their reaction to a touch 2006, and the fact that the slack was taken up by their competitors, should have a great effect on the PC industry this year.

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