There has been tremendous hype about Tablet and Mobile Computing. However, I often get doubters, in fact myself doubted whether this was just a "Fad" which would dissipate in a few years or was there something concrete. The utility of tablets vs. PCs have been debated endlessly and this blog is not about the technical merits of one or the other.
A few recent trends in the PC world has convinced me that PC computing as we know it is going to be "abandoned" by major manufactures. PCs might not die easily(Hell, even mainframes are not dead, with a major competitor of my client still selling new AS/400 based systems), but it will easily loose prominence and support and cede the way for the tablet and this has nothing to do with technology.
To understand this phenomenon we have to understand the eco-system that supports the PC world. In the PC world "Wintel"(Windows+Intel) was king. People, wanted a Windows PC running the latest Intel X86 Processor(486, Pentium, i3,i7...the list is endless). Everything, else was just pricing. Windows and Intel were making most of the money and here is the key point:
Hardware Manufacturers had profit margins in single figures or lower double figures.
Indeed, it was this lack of profit margins that made IBM , the inventor of PCs to sell of it's PC business to Lenovo!!. IBM(wisely) decided to concentrate on the much higher margin software business. HPs recent declaration to do the same citing profit margins further corroborates this. HP(since it consumed Compaq) is the largest seller of PCs in the world and wants to sell this off. The problem for hardware manufacturers is that margins are razor thin at 6%-11% for American companies. The problem is even worse for Asian companies with some selling at margins of nearly 2%. The eco-system is shown in the figure below:
Source: DataInsights
Why do hardware manufacturers still make PC's if the margins are so low. The answer, is simple: Volumes!!! HP's 5% margin on it's PC business still contributes to half it's revenues and profits of nearly a 9 Billion Dollars.
So clearly in the PC world Intel and Windows were king having profit margins in the 30-40% level while PC manufacturers were to use the economic term: commoditized.
But what about Apple you may ask!! Apple being in control of their entire chain always maintained high profit margins even for Macs. Apple gets more profit from the sale of 1 Mac as compared to 7 PCs by HP. Apple however did not get the volumes in the Mac as compared to HP and Dell and Pcs and such were things until something disruptive happened: The tablet was born(re?) with the iPad.
It is clear from all market data that the iPad and tablets are cutting into PC sale volumes. The figure below shows the trend of notebook sales(Source: OnlineMarketingTrends)
Indeed IDC PC Watch has shown that overall Year-on-year in 2010 and 2011 PC/Netbook shipments have fallen by about 4.2% with the only silver lining being a bullish sales of MacBooks and Lenovo in the US.. Compare all this doom and gloom with the tablet market. Apple's Profit Margins on the iPad is rumored to be at: 42%.
But here is the real deal: When you go and buy a tablet you buy an Acer, a Playbook, A Samsung Galaxy not Android+ (Whatever Processor) or iOS.
This means that once again hardware manufacturers are free and the wide range in specs for the tablets means that they can get much higher profit margins with high volumes(oh joy!!).
Add to this the fact that Android is free(Google makes no money in it) and you can see why all hardware manufacturers are moving like droves to the tablet market.
And this is why non-iOS tablets are so expensive. In trying to keep their margins high, manufacturers like HP, BlackBerry and the rest are trying to sell it at prices comparable to the iPad but not having the same features.
The aim is simple, to quickly become a market leader in this area. This is no different from IBM who in the first few years of the PC era was making profits at 40% before being beaten down by nimbler competitors like Dell, Compaq and subsequently HP.
But what about "WinTel". Both companies have missed the bus. Intel lost to ARM and NVIDIA as most tablets are powered by these processors and Microsoft is increasingly seeing the carefully built OEM eco-system being completely taken apart.
But more surprising are Microsoft's moves, however logical considering the big picture:
- Partner with Nokia(another struggler) to get the hardware edge
- Reveal "Metro" UI as default UI for Windows 8. The "Metro" UI is more optimized for touch rather than click.
- Make Windows 8 work on ARM without support for older Intel Based Apps!!!
- Remove Plug-ins from Windows 10 "Metro Browser"
- Make the Programming for Metro as HTML+JavaScript in preference over .NET
In other words Microsoft has relegated the "Desktop" to second place. Though, it will still support the desktop, it is clear that the desktop will in a few years be what Win 95 is to us. A relic of times past.
Even their Server strategy has taken a major change. Windows 8 Server beats the pants out of cloud computing technology like Citrix and other major cloud systems. Gone are it's emphasis on .NET servers alone.
Clearly in the long-term(3-5 years?) MS is betting that the changed economic systems means that PCs and Netbooks are relegated to ancient technology pieces with hardware manufacturers literally forcing the tablets down the throats of users.
We live in interesting times and the chess game has just begun as the industry sorts itself out. This entire situation is an ode to the man who started the PC revolution, lost, started the animation revolution , the mobile apps revolution and finally the tablet revolution: Steve Jobs!!!. Let the chess game begin
11 comments:
Microsoft has huge profit margins on desktop software, so why is it switching over to focusing on tablets?
Nice analysis and thoughts.
What's far from clear is why customers will want to buy tablets at 40% profit margin for the manufacturer than cheaper and more productive notebooks at 5% margin. The latter will be cheaper and better.
Just because it's somehow "newer"? Will market forces suddenly cease to function? I doubt it.
@Jonas, that is where a technical debate on which is better a notebook or a tablet comes in. For a majority of consumers, who only surf the internet , play a few games and watch a few movies a tablet is a far better device as witnessed by the adoption of the iPad. For the super-users, who need to make documents, program etc. the netbook is still the device of choice.
There are already hybrids coming out like the Thinkpad tablet that has for an additional $100 a Keyboard making it exactly like a netbook running Android.
The point is hardware manufacturers see a way out of the low margin and wintel monopoly business in tablets and hence are doing their utmost to capture this market before market forces come in and force margins down.
@Anonymous, this is why Microsoft needs to abandon the PC. Without, hardware manufacturers and OEM MS software is useless and can't be distributed.
That graph showing iPad affects notebook sales is quite a speculation, it's not clear that tablets are cutting into PC sale. In 2Q11, 4.69 million iPads were shipped; in 3Q11- 9.25 million. According to Gartner, in 2Q11, 85 million PC were shipped. PC's clearly overshadow tablets. A more accurate speculation would be, that the economic downturn put the brakes on PC purchases of the masses, while the affluent buy iPads to complement their PC's. But the economy eventually does picks up, and the masses are more for value, than overhyped and overpriced trinkets.
The ubiquitous PC is such a commodity, that HP and the major manufactures can't compete with Asian generics that survive on razor-thin profits. Of the 85 million PC shipped, 34 million is from the non-major Other.
More robust and capable PC's are better value for the masses than toy-like tablets. What do you call an iPad that has a bluetooth keyboard? - a gimpy laptop. There's already a way far more successful tablet form than the oversized iPad- that's the touchscreen phone. Until tablets become more capable, more people will have the PC and phone combination.
@Anonymous, I concede the tablet has not won over the PC yet. However, there is an increasing momentum in most enterprises(the key users of PCs) to go the tablet route and this is because they see a greater ROI in tablets than PCs. The calculation is based on the PC Cost+ Cost of MS Software+ Cost of Anti-Virus+ all the extras(like managing these) versus the much simpler tablets. Google, tried to capture this sentiment with the ChromeBook showing how the ROI is much better. However, they failed primarily because their vision of everything in the cloud is a little too early and their pricing needs to be drastically lower.
Its the same thing with tablets. If pricing comes down (1/2 of a netbook cost or so) Enterprises that just do data-entry/basic accounting will soon find it easier and more productive to deploy tablets rather than PCs.
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I wanted to thank you for this great read!! I definitely enjoying every little bit of it I have you bookmarked to check out new stuff you post
I like this app a lot, i have it in my phone.Features like GPS devices or portable gaming devices etc are the basic thing behind the success of smart phones but there is fact that Mobile apps are playing a major role to maintain the market value and user's interest in the product.
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