The impact of “cheap” on PC buying psychology

Paul Thurrot wrote an excellent analysis of what may have held back Windows 8 sales during this past holiday season.  I think when you couple consumer’s expectations that notebook PCs should sell for $300-$500 with the absence of any of the new tablet/convertible devices being available at retail you get a pretty good picture of what happened.  Throw in consumer caution about Windows 8, driven by pundits who knocked it, and you’re close to 100% of the story.

The good news is that Windows 8 will run on pretty low-cost systems.  Paul has another post with Best Buy’s current deals that helps explain the situation.  The $369.99 Toshiba Satellite in the ad looks pretty sweet for a mainstream PC buyer.  Want a touchscreen?  The cheapest option with a similar configuration is the $579.99 Acer Aspire.  That’s a 57% markup primarily to get a touchscreen.  Or to put it in another perspective, you could buy the Acer or you could get the Toshiba and an Amazon Kindle Fire, and still have enough left over to cover your Starbucks bill for a week.  Want something in the heavily promoted Ultrabook camp and you are talking $700 and up.

The Toshiba isn’t a bad system for running Windows 8.  It has a 1366×768 display so you can use Windows 8’s Snap feature to have two Metro apps on the screen at once.  And it has a multi-touch trackpad so you can use gestures for navigating around Windows 8 even though you don’t have a touchscreen.  These are both valuable, but not near enough to get anyone to throw away the two, or three, or four-year old notebook that is working fine for them.

Overall when you look at the classic PC business it is now largely a replacement market.  And without a compelling reason to replace a notebook, and with consumer’s dollars now in search of Smartphones and Tablets, the replacement cycle for PCs keeps stretching out.  It’s not simply a pricing problem, though clearly that plays a role.

What’s at the root of the Vendor/Consumer pricing discrepancy?  It is partially the dynamic that Paul wrote about in which Netbooks dragged the average selling price of PCs into unprofitable territory while setting consumer expectations about future pricing.  Vendors are hoping that new technologies will both let them increase their average selling price (ASP) and accelerate the replacement cycle.  So far they haven’t found the formula that does either.

The second factor is a classic demand/supply problem.  Touchscreens are in very short supply with Apple and a few other players having locked up the entire supply chain.  That is keeping supply of touchscreens for notebooks low and prices high.   Just keep in mind that we’ve seen this before, particularly with display technologies.  The heavy demand and high prices will drive a lot of manufacturing expansion and within a year or two supply will catch up to demand.  At that point prices will drop dramatically, both for touchscreens and for the systems that incorporate them.

But some of this misses the point.  A $449 touchscreen notebook would slightly improve ASP but would have little impact on the PC replacement cycle nor lead to new business.  A $349 touchscreen notebook would harm ASP but only minimally shorten the replacement cycle.  To shorten the replacement cycle in a meaningful way and generate new business you need more dramatic change.  That’s where Windows Tablets and Convertibles come in.

To accelerate the replacement cycle, and expand the overall base of PC systems, you need form factors that meet needs that existing form factors can’t meet.  Windows 8 targeted those with its support for tablets and convertibles, but those devices were largely absent from retail this past holiday season.  These form factors can accelerate the replacement cycle by allowing the consumer to carry one less device around.  It allows a scenario where the customer prematurely replaces an existing notebook with a convertible rather than add a tablet to their computing mix. They also help with ASP expansion because they are replacing two devices, allowing a consumer to justify spending more.     The fact that all Windows 8 tablets introduced to date either come with, or have available, a keyboard dock (or cover) also testifies to how the PC ecosystem sees their ability to be both tablet and notebook as the key to revitalizing the PC business.

What we saw this past holiday shopping season should not have been a surprise as there was nothing going on in the stores to convince consumers they should replace PCs that were working just fine for them.  Touch will become a ubiquitous part of the computing experience, and help keep PCs relevant, but touch alone will not shorten the consumer PC replacement cycle.   For that to happen we need more dramatic form factor expansion.  Those convertibles and tablets are just now appearing at retail, so we won’t get our first really good read of the impact they are having until companies start posting first quarter 2013 results.

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11 Responses to The impact of “cheap” on PC buying psychology

  1. blue ninja says:

    Local government and private power utilities are rolling out smart power meters in my area. We are part of the pilot. A representative turned up at the door this weekend to introduce us to the program, get a signature and capture personal details. This was all done with an ipad app, including the signature.

    Public utilities and state governments are developing and using ipad apps for workflow and data capture!

    We are well past the ‘inflection’ point. These new devices need to ‘do’ something better. I suppose a cheaper form of ipad will be compelling to these large traditional, conservative organisations, but it will be a long catch up and dropping the legacy business models – trying to rope everyone into visual studio, dotnet, office, windows, AD, Sharepoint, SQL Server, etc…

  2. JimmyFal says:

    FYI, that Acer you linked to does not have a touch screen at 15″, this one does at 11.6″ for $499. I love this little thing by the way, I think it could be the next netbook. Something to be said for a hinged screen little bugger with an Intel processor if you ask me.

    • halberenson says:

      Thanks! Best Buy listed that Acer under touchscreens even though it apparently doesn’t have one. Further down the page was a similar Acer for $579.99 and I updated the post to refer to that since it definitely says it has a touchscreen.

      Yeah, when they pull that 11.6″ one down $50-100 they’ll have it in the sweet spot of the market price wise. We need to see 13″ and 15″ class options at similar prices. Maybe Acer will be the one to do it.

  3. Pete says:

    I’ve seen too many ‘high end’ laptops that are plastic junk as well. The models turn over so often that it’s nearly impossible to predict quality with the exception of a very few (Lenovo ThinkPads?). I’ve given up and just tell family to buy a cheap POS every 18-24mos. For those looking for true quality- Macbook.

  4. I’m more than willing to spend $1200 – $1800 on a high-end W8 touch screen laptop that lives up the price. MSFT has a touch OS advantage right now, if they don’t figure out a way to get some decent hardware into the market, Apple is going to release a MacBook AirTouch and then MSFT is in big trouble. The single biggest thing holding back W8 is the hardware vendors and Best Buy.

    • halberenson says:

      What are you finding wrong with the current crop of higend touch screen latops?

      • On the Dell XPS12, I’m just not sure I trust the mechanism that swivels the screen. Yes, this sounds minor, but I’d like those to live in the wild for a few months before I consider that.

        If I had to pick right now, I’d go Lenovo Yoga, but part of me wants to wait for a version with the monitor that breaks off as a true tablet.

        Part of the issue right now is that there are too many options and I don’t fully trust the 1st generation hardware. Not that it has bugs, but that something MUCH better is coming soon.

        Right now, I’m very happy with my Surface RT. My old HP laptop running W7 hasn’t left the house since November. I’ll probably live with the Surface as my primary computer (away from my desktop) until I really feel the need to upgrade.

        I think a lot of folks have a wait-and-see attitude right now. Not because they are skeptical about W8, but because they are optimistic about the W8 product pipeline. Add all the rumors about MSFT doing their own devices and things just get crazier.

  5. Tomasz R. says:

    A nice device with innovative form factor is the new Nvidia game console “Project Shield”. It has both a classic gamepad, and a touchscreen while at the same time being portable, but with the ability to connect to standard HDMI monitor/display. It runs stock Android, so the availability of games won’t be a problem – game companies just have to add controls for a classic gamepad. Also games for Android are cheap.

  6. Mark says:

    It’s easy to blame the netbook, but MS and OEMs were more than happy to have the sales assist it provided at the time. My wife bought me one then and frankly I’ve used it about twice. They really were terrible and it’s no surprise that they started to wane and then iPad killed them off entirely. That said, prices for PCs have been coming down for a the past two decades. The netbook is just an evolution of that. And frankly with the emergence of viable business models that no longer rely on making money directly off the hardware and OS (i.e. Google, Amazon), there’s little reason to think prices won’t keep coming down and maybe at an even faster rate. I don’t see how MS will compete well in that kind of market. But I agree with Paul that prices of W8 devices will certainly have to be much lower. Indeed, MS will face pressure over time to lower its OEM licensing costs as well, as it did temporarily when it initially wasn’t the OS choice on netbooks. The bigger question for me, and which I’d be interested in your thoughts on (maybe a future blog topic?) is where is future growth for MS going to come from? I don’t see an obvious answer, at least as currently structured.

    • halberenson says:

      Microsoft certainly wasn’t happy about netbooks as the entire concept was built around the notion that you really just had a smart web terminal not a full-fledged computer. Microsoft was forced to make lemonade out of lemons, and luckily for them it worked.

      All of Microsoft’s businesses have growth potential, but the biggest existing businesses will always have somewhat slow growth due to the law of large numbers. Even within the Client OS space there is significant room for growth given that only about 1/6th of the world’s population has computing devices and even amongst that population the number of devices per person can continue to grow. So expansion is possible along two dimensions. One has to get used to the idea that instead of Microsoft owning 90% share of a narrowly defined market (desktop and notebook PCs) of 1-2 Billion devices they may end up with 50% of a broader market opportunity of 5-10+ Billion devices. And yes, that this will compress margins. Strategically Windows 8 and RT are a repositioning of Windows to be able to address this broader market opportunity.

      More broadly the answer deserves a blog entry of its own. But overall, Microsoft is positioning itself to participate in just about all the high-growth computing-related technology businesses. The opportunities for growth are huge, but the certainty and degree of success is far lower than when people think of the Microsoft of the 1990s. On the other hand there are areas where I think Microsoft will far exceed expectations. The cloud, and particularly Windows Azure, is one. Information Worker is another.

      • Mark says:

        Thanks for the initial feedback, Hal. Look forward to your extended thoughts on the topic if you get a chance to dedicate an entry to it.

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