PC prices must rise, not fall, to solve Windows 8's lousy start, analyst argues

OEMs to blame for poor Windows 8 sales over the holidays, says retail expert

The holiday slump in PC sales -- down 11% compared to 2011 -- means that PC makers must raise prices, not continue a race to the bottom, an analyst argued today.

Windows 8 failed to turn around slumping PC sales during the recently-concluded holidays, final data from U.S. retailers showed, confirming earlier estimates.

The answer, said Steven Baker of the NPD Group: Raise prices.

"This had to happen," Baker said in a Monday interview, referring to the unsustainable razor-thin margins and the continual rush to undercut competitors' pricing. "Even if Windows 8 had been a warmed-over Windows 7, [OEMs] would still have been beaten up," Baker said of a counter-factual where Microsoft just kept doing what it had been doing, and declined to turn Windows in a different direction.

According to NPD's numbers, PC sales during the 2012 holidays -- starting in late November and running through the end of December -- were down 11% compared to the year before. Earlier data from NPD, from just before the Oct. 26 launch of Windows 8 through the Black Friday weekend of Nov. 23-25, portrayed sales as off 21% from the same period in 2011.

2012's 11% holiday downturn was consistent with the year-long slump in PC sales, said Baker. "Despite the hype, and hope, around the launch of Windows 8, the new operating system did little to boost holiday sales or improve the year-long Windows notebook sales decline," he wrote in a Jan. 4 statement.

Experts have struggled to explain the slow start for Windows 8, which according to some metrics lags behind the uptake of 2007's Windows Vista, a perceived flop. They have cited a sweeping set of reasons, including a weak economy, Windows 8's confusing dual interfaces, enterprise upgrade fatigue after migrating to Windows 7, and competition from tablets -- nearly all of which run a rival's operating system -- for technology dollars.

Baker pinned Windows 8's inability to invigorate PC sales not so much on Microsoft, but on its OEM (original equipment manufacturer) partners who design, make and sell Windows PCs. Essentially, OEMs failed to convince enough buyers that notebooks with touch-sensitive screens -- hardware able to strut the new operating system's biggest innovation -- were worth their higher prices.

Baker traced that failure in part to years of habitual price cuts by computer makers that intensified between 2008 and 2010, when netbooks -- smaller, less-capable, and above all else, cheaper portables -- were the rage, accounting for upwards of 20% of mobile PC sales.

On Saturday, long-time Windows watcher and blogger Paul Thurrott cited NPD's data to make a case that netbooks poisoned the well. Baker seemed to agree.

"If you use the netbook analogy, OEMs 'trained' customers to devalue their products," said Baker. "They told customers then that what they had been paying $800 for before was really worth only $300. That dragged down pricing across the board."

Netbooks, in fact, created the sub-$500 Windows notebook market, Baker said more than two years ago in an interview with Computerworld. That fueled sales, but at the same time depressed revenue for OEMs.

Over the holidays, said NPD, the average sales price (ASP) of a PC notebook sat at $420.

Those low, low prices now haunt computer makers: A sub-$500 laptop simply can't show off Windows 8 and touch. And because consumers have been trained to expect cheap PCs, they were unwilling in 2012 to spend enough to justify a move to the new OS.

Additional NPD data showed that was what happened. During the holiday season, sales of sub-$500 PC laptops dropped 15.5% from 2011's number. But sales of notebooks in the $500-and-up category increased by 3.5%.

"Windows 8 and touch is the right product," Baker asserted. "But Windows and touch at $349 is not. It just is not a good enough platform for Windows 8. And it's trying to compete with tablets."

And failing.

"A tablet does everything that a low-end PC is expected to do, and it has touch," said Baker. "Those tablets can sell for $200 to $250, because their makers don't expect to make money from the hardware."

But while Thurrott contended that the PC industry had to solve the poor sales problem by lowering prices, Baker said just the opposite.

"That's just not a winning battle," he said. "Does touch have to average $700 to $900 [for a notebook]? No. But it has to average $500 to $700. Cheap PCs just cannot compete with tablets."

In other words, OEMs must stop racing to the bottom of the price barrel, and instead take on the much tougher task of raising prices and convincing consumers that it's smart to pay more to get more.

If that sounds familiar, it's Apple's personal computer business model in a nutshell.

"It won't be easy, but it's doable," Baker said of computer makers' need to talk customers into paying more for a credible Windows 8 laptop. "There's evidence that it can be done. Before 2009, people willingly paid $600 to $700 for computers, and that was with a crappy operating system, Vista. But you need the right product."

As an example, Baker gave a nod to Lenovo's IdeaPad Yoga 11, a $799 hybrid that runs Microsoft's Windows RT, the tablet-oriented spinoff of Windows 8.

Baker was optimistic that the computer industry would take note of 2012's data, and learn the lesson that they must persuade consumers to spend more.

"They see it in the sale numbers, customers are telling them that," Baker said. "I think they'll recognize where prices have to be. But more than ever, PC makers have to make the argument that the Swiss Army knife of the PC has value, that it can handle productivity and entertainment that tablets can't quite match yet."

During the holidays, NPD's tracking showed that sales of touchscreen-equipped notebooks broke into four almost-equal parts, with a quarter of sales in the under $500 range, a fourth in the $500 to $700 category, 25% in $700 to $900, and the final quarter priced above $900.

"They're the kings of adaptability," Baker noted of OEMs. "The real issue is going to be patience. Moving into higher prices is something very different from what they've been doing. The business got stagnant, and they were using a big price crutch to sell PCs."

Baker maintained that the shake-up of Windows 8 would be good for the business, although with his "patience" mantra, not immediately.

"Things won't improve, certainly in the first half of the year," he said. Windows 8's next shot at improving PC sales: The back-to-school selling season, which typically kicks off in June and runs through September.

"I think there's still enough optimism [among OEMs] about Windows 8," said Baker.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

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Tags NPD GroupMicrosoftdesktop pcshardware systemsWindowssoftwareoperating systemsPCs

2 Comments

Tom Brown

1

Yes, the rush to the bottom is not an enigma. Customers have learnt what vendors idea of loyalty is, it is a platitude to justify their lack of loyalty, service or honesty, then for the vendor to ask that the customer be loyal joke on you once.

Most customers have no reason to make a choice other than price. The vendors reinforce this by their marketing strategies.

Poor and irresponsible service, a result in prices being too low to pay for service (I currently am involved with an Acer service issue which has been a ridiculous saga), lack of sales integrity, price consistency and price performance have led customers including the small channel partner to a cynical objectivity about the industry.

The reference to Vista is unjustified. Vista was and is fine, Windows 7 and 8 are based on Vista. We had XP for so long so many suffered from neophobia about Vista and to justify their attitude they still demean the OS.

At the time of Vista the PC and notebook market was very different and many were in need of and wanted to upgrade and many more were wanting to make their first foray into the internet. XP, Vista and Windows 7 are still good robust systems which the user sees as doing everything they need. But computing has changed, it will take 6 months before that change becomes apparent. The rush is past and a steady development of market understanding will lead people to make better decisions on their purchases.

MikeG

Staff

2

Top comment, Tom. There's a lot of emotion flying around Windows in its various incarnations since the release of W8. This is a fine piece of down-to-earth analysis.

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