What's to Blame for PC Turmoil?

This past year was a very tough year for the PC industry. We at Creative Strategies estimate that shipments of PCs worldwide will be off five percent for 2012 and we project that in 2013, shipments will grow about two to three percent, at best. Interestingly, if you include tablets in the PC category and add them to the overall PC shipments for 2012, then PC shipments would actually be up 11 percent over 2011. But in this real world of computing, PCs are still considered a separate category and that won't change for some time to come.

Tablet sales, however, are growing rapidly. In 2011, about 90 million tablets were sold and we project that in 2012, close to 180 million will have been sold. By 2015, tablets are projected to outsell PCs.

This growth in tablet sales is the key reason that demand for PCs and laptops have taken such a hit. Many 10-inch tablet owners have found that their devices can be used for not only content consumption, but also content creation and productivity, tasks conventionally designated to the PC. They have therefore held off buying new laptops or PCs. If they do buy a new machine, they opt for a cheap model in a lot of cases since it is hard to justify paying a premium price for a PC that may be used only as a secondary machine.

This industry slowdown threatens most PC vendors since almost all of them, except Samsung and Apple, have focused their efforts solely on the PC business. Traditional PC vendors struggle with shrinking margins and making money has been difficult. This double whammy is what has caused so much turmoil in the PC market for the last 18 months and caused industry execs great concern about the future of the industry.

Sure, some of the big PC vendors are also producing tablets, but to date, their efforts have not helped them gain any ground in the tablet market against Apple, Samsung, Google, and Amazon. They might never be able to compete with them given their major lead in tablets. In fact, HP and Dell don't really even have serious consumer tablet players at this time. Lenovo, Acer, and Asus seem committed to tablets in both Android and Windows 8 flavors but it is too early to tell if they can gain any ground against the big tablet players.

That means that for any of the traditional PC vendors to stay healthy, they need to see a revival in demand for PCs. This slowdown in sales also impacts Intel and AMD and they too need to see growth in PCs to stay profitable. While demand for tablets clearly has an impact on PC demand, the silver lining heading into 2013 is that when people buy 7-inch tablets, which should be the largest growth segment of tablets sold in the New Year, they will soon realize that they are ideal for media consumption and Web browsing but not for productivity tasks. That suggests that those who mainly use 7-inch tablets most likely will go back to using laptops and PCs to tackle productivity. PC industry executives see this as good news and hope that this fact, along with the coming of sleeker laptops and Windows 8, could finally start moving sales of PCs forward by mid-year.

There are also some interesting numbers that help them remain optimistic that PC and laptop sales could jump, especially by the end of 2013. It turns out that there are 213 million one-year-old PCs in use, 215 million two-year-old PCs, 179 million three-year-old PCs, 110 million four-year-old PCs, 45 million five-year-old PCs, and 12 million six-year-old PCs. Most enterprise buyers turn their PCs over at the end of three years or so and most consumers start refreshing their PCs by the middle to end of their fourth year. At least in theory, there should be as many as 225 million PCs that could be ready for upgrade throughout 2013. Add in the five- and six-year-old PCs and that number could be even higher. Of course, many people have started to keep their PCs even longer and we know that those who use a tablet for most of their PC functionally may be much slower to buy up as well.

To that end, the PC industry is planning on doing a few important things in 2013 to try and ensure that PC sales start to rise, even if they may never get back to the former healthy growth rates of 10 to 15 percent. First, vendors will move most of their laptops into the ultrabook category and start advertising them heavily. In 2012, ultrabooks accounted for only about 20 percent of laptops sold, but industry execs hope to get that number up to at least 35 to 40 percent in 2013. They also take heart in knowing that ultrabooks are the future of laptops. Very soon, ultrabooks will replace the larger and clunkier laptops in vendors' lines and they hope that these thinner and lighter laptops start catching the attention of business users and consumers alike.

Second, in the enterprise refresh cycle, buyers are already starting to add ultrabooks to their lines. Some are even suggesting that if their users buy their own laptops as part of a BYOD program, they should move to ultrabooks as well. Over time, most IT buyers will move to ultrabooks but their refresh cycle is still in question. Some enterprises have started holding their laptops for well over the three-year average and PC vendors, along with Intel and Microsoft, need to give these types of buyers a compelling reason to upgrade.

That compelling reason could very well be pricing. In our research, consumers tell us that they are willing to spend $599, at most, on a new laptop. The problem is that most ultrabooks are priced in the $799 to $999 range and if ultrabooks are to get into more consumers' homes, the prices have to come down significantly. The good news is that I have seen a few ultrabooks priced at $699 this holiday and this suggests that at least some models will break the $599 price barrier by late 2013. Interestingly, the cost of goods on ultrabooks, including those with touch screens, should decrease quite a bit by the end of 2013, meaning that many ultrabooks should be around $599 by the middle of 2014. Consumers also seem interested in Google's Chromebook. Some of these laptops are priced as low as $249, making them quite attractive and potentially helping the laptop segment grow in 2013-2014 as well.

This all means that 2013 will be a transition year for most people. Those with 7-inch tablets will come to realize their devices cannot do the double duty that 10-inch models can in terms of consumption and productivity. Smaller tablets will mostly be used for content consumption and Web browsing. Once this is solidified in their thinking, those with smaller tablets should be using their laptops much more for productivity and, at least in theory, start upgrading them once they get past the three- or four-year mark. That is why most of us researchers see PC units shipped in 2013 having a very modest two to three percent growth. If this theory is correct, then 2014 should be the year when all laptops start transitioning to ultrabooks as the next major form factor in portables. As prices go down, we could see some serious demand from both IT and consumers, hence why early PC forecasts for 2014 are above five percent and many are in the seven to nine percent range.

There is no question that tablets have been a disruptive force in the PC market and to date, they have been the main reason we have seen PC sales soften considerably. However, PC and laptops will continue to have a place in the market and if 2013 does solidify the role a tablet will play in people's personal and professional lives, the chances are that they may start buying new PCs and laptops again. Industry executives are crossing their fingers and hoping that demand will increase thanks to new form factors. The prices of hybrids, convertibles, and ultrabooks should also come down over the next year and by 2014, the demand for personal computers will be growing again.