Drastic price cuts may damage PC industry, jeopardize Microsoft's hopes for Windows 10

Microsoft's strategy to kill Chromebooks could come back to haunt it in 2015, says analyst

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Windows PC makers slashed prices to historically low levels in the U.S. during the last three weeks of October, damaging the consumer business just as Microsoft tries to push Windows 10 as its salvation, a retail analyst said last week.

"The implications of a much more price aggressive PC market are enormous, and while many of them are positive, many are not," said Stephen Baker of the NPD Group in a good news-bad news post to his company's blog on Friday.

In the span from Oct. 5 to Oct. 25, the ASP (average selling price) of Windows-powered personal computers was $430, down 10 percent from the year before, according to NPD's data. During the week of Oct. 5, the Windows notebook ASP was even less: $415.

"In contrast, the ASP last year at this time was around $480, a monumental change in pricing for a category that had seen stable pricing for the last few years," Baker said of the "Black Friday"-like numbers.

Although the price cuts were good news to consumers shopping for a PC, Baker questioned what the business would look like in 2015. "I would say this is damaging rather than unsustainable," Baker said in an interview Friday. "Some can withstand these prices better than others. But from an overall perspective, clearly at the end of the cycle, there are going to be a lot of losers."

U.S. retailers like Best Buy and Walmart can withstand an extended stretch of aggressive price cuts, as can some OEMs (original equipment manufacturers) such as Hewlett-Packard. But not every retailer or OEM has the resources to stick with those prices.

Baker predicted further consolidation as those unable to play in the ultra-low price bands bickered over an evaporating pool of sales in the $450-and-up range.

More importantly, said Baker, was that the price cuts were changing the design and manufacturing of PCs. "The challenge isn't that the ASP last year was $500 and that next year it will be $300, but that these lower-priced PCs are being designed and marketed and intended to be sold at $199 to $249. In the past, those prices have been reserved for models at the end of their cycles. Now they're pervasive."

At those cut-rate prices, touch -- once a major part of Microsoft's Windows 8 strategy -- disappears.

"The Windows notebook PC segment above $300 has been decimated, with sales down 10 percent over the past three weeks," Baker said in the blog. "This has impacted the uptake of touch in the Windows market as well. Basic clamshell notebooks with touch only accounted for approximately 25 percent of the Windows market over the past few weeks, in contrast to points earlier in the year when it was above 30 percent."

Flooding the market with cheap products has also affected sales of Windows 2-in-1 devices, hybrids that boast traits of both tablets and notebooks. According to NPD's U.S. retail sales data, the 2-in-1 market remains stalled at 11 percent of sales.

The price cuts will benefit not only consumers, but also Apple, Baker argued.

Although Apple has cut prices in the last year, its Macs remain premium machines at premium prices. With Windows PCs, especially notebooks, being designed and marketed -- explicitly or not -- as disposable, buyers looking for a longer-lived, higher-quality system will increasingly turn to Apple's MacBook lines, Baker said.

Apple's job will be made all the easier by a decay in the higher-priced Windows PC market. "How do you maintain a premium product segment when most of the entry-level stuff is good enough?" Baker asked. "It's all about managing prices. And that's exactly what Apple is best at. It doesn't get enough credit for how smart it is on pricing."

Discounts have spurred sales -- no surprise -- and have been largely possible because Microsoft launched Windows 8.1 with Bing, a subsidized OS offered to OEMs so they could sell notebooks at prices competitive with Chromebooks. While that strategy has worked to some degree -- Chromebooks' share of the U.S. entry-level notebook market is now under 20 percent, said Baker, compared to the high 20s this time last year -- it may hurt the Redmond, Wash., company's Windows 10 effort next year.

"What does the Windows PC market look like when we come out of the holiday season, and what would a permanent decline in notebook ASPs do to the market ahead of the launch of Windows 10?" Baker asked. "I suspect the answer is a significantly weaker PC business, less able to support Windows 10."

Baker based his take on a belief that by heavily discounting prices, and so sacrificing features, performance and build quality, OEMs will have an even harder time convincing consumers that PCs have something to offer that tablets or even smartphones cannot provide. "[OEMs will be] less able to clearly differentiate what makes a PC a compelling choice against a tablet or a smartphone," Baker said.

But pervasively cheap PCs may cause other ripples, too.

Minus touch-enabled hardware in consumers' hands, Microsoft's continued -- albeit de-emphasized -- pitch for touch in Windows will be made increasingly irrelevant, perhaps putting an end to the company's experiment with building two input user interfaces (UI) in one desktop OS.

Low-priced PCs could also reduce spending for software and services to the detriment of the Windows application ecosystem and even Microsoft's attempt to shift revenue generation from the operating system to other avenues, such as Office 365 subscriptions. People who pay little for their hardware typically pay little for after-market software or services, as many Android smartphone makers have discovered

Likewise, a flood of inexpensive PCs running the free or nearly-free Windows 8.1 with Bing would affect Microsoft's ability to sell Windows licenses to OEMs for any consumer machine and perhaps quash plans to charge for a Windows 10 upgrade. After all, who would pay historic prices -- around $100 -- to upgrade from Windows 7 when a new machine can be had for just twice that?

Not all Windows PCs are racing toward the bottom of the price barrel, Baker pointed out. "There is still plenty of stuff going on in the corporate markets that deliver much higher ASPs," he said.

But on the consumer side, the plummeting prices of PCs -- which Microsoft is driving -- becomes yet another example of the company's radical new strategy of eschewing revenue there in the hope it translates into larger volume and more users who, perhaps in their workplace, can be forced to pay. Last week's shifting of the boundary between free and paid usage of Office on the iPad was a similar indicator.

"The implications and challenges around a new level of Windows notebook pricing will reverberate around the industry," Baker said.

And that industry includes Microsoft.

This story, "Drastic price cuts may damage PC industry, jeopardize Microsoft's hopes for Windows 10" was originally published by Computerworld.

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