The data that I am looking at right now — that shipments of personal computers were down by more than 10% in the first half of this year — seems to support the thesis that PC users will eventually all migrate over to mobile devices. After all, the second quarter marked five consecutive quarters of year-over-year declines — the longest period of declines on record for the PC industry. Still, the PC market represents a $200 billion opportunity — and that is worth going after.
Catalysts on the horizon
There are, however, two major catalysts on the horizon that may cause PC sales to bounce back in one or both of the last two quarters of this fiscal year: Intel Corporation (NASDAQ:INTC)’s new microprocessor, Haswell, which was reportedly very well-received by users and analysts, and Microsoft Corporation (NASDAQ:MSFT)’s release of Windows 8, which has effectively incorporated consumer complaints about the software in order to improve functionality (yet may not have been designed with the enterprise end user in mind).
Even with these two catalysts, though, it is unclear whether or not corporations will find enough value in these improvements to justify a PC refresh, especially if hiring does not pick up. What’s more, with the Federal Reserve signaling that interest rates may rise, it is unclear whether or not lending, which has remained tepid, will pick up and whether or not capital will flow to small and medium-sized businesses.
A cultural shift
The reality is that there is little product differentiation in the PC space, and Lenovo, a low-cost Chinese brand, has emerged as the market share leader in the industry, even though its shipments are also declining. That is because the most important thing to consumers is increasingly no longer the hardware, but rather the types of applications as well as the content and data that can be accessed on these tools. Consumers want the ecosystem and the PC does not lend itself to the consumption of content — books, movies, applications, music and games — the way that Apple Inc. (NASDAQ:AAPL)’s and Google Inc (NASDAQ:GOOG)’s devices and application stores do.
The smartphone market is also under pressure. That market is also becoming more and more commoditized as Apple and Samsung, the two market leaders, have trouble developing anything other than line extensions that offer few new benefits.
The Microsoft and Dell strategy
As the tech sector continues down a structural shift towards mobile, Microsoft Corporation (NASDAQ:MSFT) and Dell Inc. (NASDAQ:DELL) will need each other more and more. After all, Apple Inc. (NASDAQ:AAPL)’s iPhone operating system and Google Inc (NASDAQ:GOOG)’s Android platform are clearly dominant and Dell’s PC and PC-related business still represent two-thirds of its sales (as compared to one-third for enterprise products).
By going private and partnering with Microsoft, Dell Inc. (NASDAQ:DELL) can focus more on developing enterprise solutions (a business that Microsoft will also have to focus on). And Microsoft Corporation (NASDAQ:MSFT) can sleep better and night knowing that it has a loyal hardware partner whose products it can influence.
Together these two tech titans can collaborate to deliver solutions that reduce complexity as well as improve productivity and security. Still, Microsoft must be careful not to alienate itself from Lenovo and Hewlett-Packard Company (NYSE:HPQ) as its war with Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) heats up.
And then we have Intel
Intel Corporation (NASDAQ:INTC) fairly recently appointed a new CEO, Brian Krzanich, who has reduced capital spending from $12 billion to $11 billion, and appears to have a mobile strategy with Intel’s Atom architecture, Silvermont, which will support both Windows and Android.
Mr. Krzanich also acknowledged some of Intel’s past strategic blunders. In fact, he stated that “Intel Corporation (NASDAQ:INTC) was slow to respond to the ultra-mobile PC trend. The importance of that can be seen in the current market dynamics. The traditional PC market segment is down from our expectations at the beginning of the year while ultra-mobile devices like tablets, are up.” So far, Wall Street has responded favorably.
3 things to watch
1. Dell going private. Over the past few months we have seen a lot of speculation about whether or not Dell will go private and the impact that this will have not only on the industry but also on Microsoft Corporation (NASDAQ:MSFT)’s relationship with Dell.
2. Strategic partnerships. Lenovo and EMC Corporation (NYSE:EMC)’s partnership should effectively more than balance the power of the Microsoft and Dell partnership. Moving forward, it will be interesting to see what other alliances emerge as a result of Dell Inc. (NASDAQ:DELL) going private.
3. Consumer sentiment. Despite a weak PC market, Hewlett-Packard Company (NYSE:HPQ), Dell and Lenovo have all significantly outperformed the NASDAQ. That is very interesting. Especially if you consider that the underlying fundamentals of these companies really haven’t changed that much if at all.
My foolish take
The entire PC-related market is arguably on life support: PC shipments are down, PC-like devices such as Netbook laptops don’t appear to be performing well, and smartphones are also under pressure. Yet, a significant shift in consumer sentiment (you should consider reading an article that I wrote several months ago, Hewlett Packard: Negative Sentiment Yields a Strong Value Play) has resulted in “old tech stocks” such as Hewlett-Packard Company (NYSE:HPQ) and to a lesser extent, Dell Inc. (NASDAQ:DELL) and Microsoft, trouncing the return of the NASDAQ over the past few months. This is in spite of the fact that Lenovo overtook Hewlett-Packard Company (NYSE:HPQ) as the leader in PC shipments and little has changed in terms of underlying fundamentals. This space is changing fast and it is important to monitor strategic relationships since they will be an important driver of innovative solutions.
Ryan Peckyno owns shares of Hewlett-Packard Company (NYSE:HPQ), Intel and Microsoft. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT).
The article What Is Going on With the PC Industry? originally appeared on Fool.com.
Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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