For years, Windows PC makers won customers by selling low-priced systems that were good enough for most computing needs. That business model no longer works, and finding a new one is going to be painful.
That suffering has already begun. This week, Hewlett-Packard and Dell cut this year’s profit forecasts, partly due to low PC demand. Acer, the world’s third largest PC maker, has also lowered its sales expectations for the rest of the year.
Very little is expected to change when Windows 8 PCs hit the market in the fall. Even the most important upgrade in years to Microsoft’s nearly 30-year-old operating system has failed to excite people who in the past would have been heading to retailers in droves to buy the latest PCs during the holiday shopping season. IDC projects less than a 1% increase in PC sales this year. “That’s a pretty weak performance, even compared with the 2011 anemic growth of 1.7%,” IDC researcher David Daoud said.
The Industry’s Pain
What’s hurting PC makers is dramatic change led by Apple. In 2008, the Mac maker introduced the highly successful MacBook Air, which set new standards for laptop portability. With Windows 8, PC makers have the OS they need to compete on features. What they don’t have are the cheap components to lure customers with a much lower price.
To compete with the Air, PC makers' ultrabooks will need the same expensive items that make the systems roughly three quarters of an inch thick and less than three pounds. Add a high-definition display or touch screen and the licensing fees for Windows and you have a price tag of around $1,000. While for Apple customers that would seem reasonable, for PC buyers, that’s out of the ballpark. Windows 7 laptops started at less than $300.
“We are likely going to see a reduced gap between the price of PCs and Mac products,” Daoud said.
And prices are not expected to drop soon. Because of high demand, the cost of the more expensive components is projected to go down slowly. “There’s nothing happening right now that’s going to cause the cost to drop drastically,” Kevin Keller, analyst for iSuppli, said.
Of course, ultrabooks won’t be the only option. People could turn to larger laptops, but they will seem ancient by comparison. As a result, many people may decide to leave the laptop world for good in favor of tablets, another market Apple started and dominates.
Again, PC makers won’t have any price advantage in competing with the iPad. Apple has set the standard for touch screen quality and performance and matching those will cost money. It’s unlikely, the lowest priced Windows 8 tablet, which will run on an ARM processor, will be much less than the lowest priced iPad at $499.
IDC estimates that the materials alone to build the cheapest Windows 8 tablet will cost $300. When you add manufacturing, marketing and sales costs, “a $400 unsubsidized Windows 8 on ARM (tablet) is probably the low end of the range,” Daoud said.
Change Is Here
Change in the hardware people use for everyday computing was inevitable, given advancements in technology that made components thinner, lighter and more powerful. As a seller of premium-priced products, Apple could afford to use those components early, setting the bar for the rest of the industry.
To compete, PC makers will have to replace their pitch from being good enough at a lower price to as good or better for the same price.