Analyst: PC Average Selling Price Collapse Permanent & Structural

| Reports

The rush to the bottom for most PC vendors has led to a collapse in their average selling price (ASP) that is both permanent and structural, according to Ezra Gottheil of Technology Business Research. In a research note to clients obtained by The Mac Observer, Mr. Gottheil said that the 4th quarter saw a major collapse in ASPs, and that this collapse is, for all intents and purposes, permanent.

The Race to the Bottom Helped by Netbooks

Mr. Gottheil said that while declining prices were helped by the gaining popularity of cheap netbooks, prices declined across the entire spectrum of PC products.

"Netbooks showed both consumer and business purchasers that, for most uses, they do not necessarily need top-of-the-line PCs," wrote Mr. Gottheil. "The recession is driving customers to value-based decisions and they will retain the habit long after an economic recovery. Like the gasoline price shocks of 2008 and the 1970s, the recession is causing PC buyers to downsize."

That downsizing has effectively completed the end-goal of PC vendors such as Dell, Acer, Asus, eMachines, and others to fully train customers to understand that PCs have no value. The race to the bottom, in other words, is just about over.

Apple

In an interview with The Mac Observer, Mr. Gottheil said that the price compression that has occurred in the market has changed the playing field for Apple, too.

Whereas the company was once one of the few players competing in the high end of the market, Mr. Gottheil said that Apple will soon be the, only player at the high end. More importantly, he added, "I don't think they can sustain that."

"Apple has always been able to command a considerable premium over similar devices," Mr. Gottheil told TMO. "[Customers are] paying for the software, better support, and the availability of [Apple's] retail network that is of immense value to customers."

Be that as it may, the analyst said that the price compression the industry is seeing is going to eventually force Apple to lower its prices. So even if the company does remain at the top end of the market, which is likely, that top end will sooner, rather than later, be cheaper than today's top end.

The company could see new pricing flexibility in lower component costs, but Mr. Gottheil said that even if the company has to eat into its industry-leading margins, prices will simply have to come down.

"Apple will be forced to produce real Macs with a lower entry price than they currently do," he told TMO. On Tuesday, that process began as Apple cut the entry-level pricing for its Mac Pro  product lines by US$300. [Edit: The article was corrected as per the comments below. - Editor]

Opportunities & Change

In his research note, Mr. Gottheil concluded, "the PC market is changing radically. Vendors must look to change their relationships with buyers, establishing longer-term relationships and providing valuable paid services after the sale. No longer dominated by hardware or software, PCs are becoming a service business."

"The change in the market presents vendors with threats and opportunities," he added. "Companies that can figure out how to embrace this trend most quickly and profitably will emerge as winners, and the winner's circle may contain different players from those who stand there now."

Much of that already applies to Apple, a company that maintains very long-term relationships with its customers, and a company that was at the forefront of selling services such as .Mac/MobileMe.

In Apple's quarterly conference call in January, Apple COO told analysts that the company looks at the recession as an opportunity, due in part to their enormous balance sheet of cash on hand. How that plays out, of course, will have to wait for time to do its work.

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Comments

Intruder

At least Apple is in a position to be able to lower their prices. Most of the others are already at the bottom of the ditch.

Tiger

Yes, but lets remember that history repeats itself. Remember what happened to the auto industry when budget foreign cars moved into the market? The Hyundai Excel bottomed out the cost for cars and it was heralded as a good thing…until they were about 3 years old and people realized they’d spent $9000 on what was substandard road hazards. As US Automakers rushed to match their prices, their standards dropped considerably. Enter the K Cars.

Today, we are living with that legacy. GM is inching closer and closer to total failure, Chrysler is still teetering on the edge of failure or solvency. It can’t decide which will get them the most benefit. Ford is the only one of the three who is capable of pulling themselves out of their hole and hopefully will do so.

The computer industry is now in the same predicament. Gateway (GM), Dell (Chrysler) and HP (Ford) are locked in a battle for the bottom dollars. Apple in the meantime has $28 billion in cash, zero debt, and is poised to ride out the lean times and NOT have to lay off employees, keep their brand name in tact, and occasionally release new/refreshed machines and products. So all this bad-talking by analysts is just sour grapes IMHO.

flightdoc

While the economy has no doubt caused consumers to be more thrifty with their purchases, I think that they will still want quality over low prices in certain purchases.  Perhaps rather than lowering their prices, Apple may bundle more software (ie iWork 09) with the purchase of the computers.  I for one, would rather spend a few more dollars on quality hardware backed by a company who is not operating on razor thin margins.

There will be those who may switch to lower cost PC’s rather than spend a few more dollars on an Apple, but for the most part, those of us who have experienced both Apple and PC’s would not return to the “Dark Side”.  Besides, from my point of view, I’d rather not have apple become a bigger player in market share.

Richard Albrecht

As a kid in the 70s, I remember the discussion of quality or quantity.  People bought something “worth it” after saving a bit, not going into debt to do it, and enjoying what they bought for years.  But I seem to be at the end of an era.  Suddenly, everyone wanted everything NOW, whether they could afford it or not.

Apple will continue to be around and strong because those who recognize true value will pay for it.

mhikl

Hi Tiger,
“Hyundai Excel bottomed out the cost for cars and it was heralded as a good thing?until they were about 3 years old and people realized they?d spent $9000 on what was substandard road hazards.”

I had the last run of the Pony- Owned it 11 years and it was as reliant as V,D and C. (Valiant, Duster, Beretta, Corolla) Beretta was a dog that ate up a lot of currency. Pony not fancy but ...

My Apples last a long time, too. I’ll pay the premium.

dave

Yes, keep the car analogy, and use Porsche, Audi, BMW, or Ferrari as the company that stands for Apple.  Have they had to reduce their prices in this race to the bottom?

Adam

“Apple cut the entry-level pricing for its Mac Pro and iMac product lines by US$300”

???

Where did the author get this information??

The entry level iMac is still 1199, and the entry level mac pro was downgraded from an 8 core 2.8 to a quad core 2.66 Xeon (albeit an i7) for 2499, the exact same price they were charging for a quad 2.66 back in 2006…


The price points are all the same as they were, save the 999 macbook,which was lowered in october, and has the same price as the entry level iBook back in 04’-06’ before they switched to intel.

The prices haven’t changed at all, just the specs.  This is the way they’ve been doing it for years.  You’ve got to hand it to Apple for keeping value in their brand.

Bryan Chaffin

You are mistaken, Adam: The previous iMac lineup started at US$1499, and is now $1199.  The 24-inch iMac started at $1799, and is now $1499. The Mac Pro started at $2799, and is now $2499.

The article is accurate as written.

Bryan
Editor
TMO

Bryan Chaffin

Well, Adam, I seem to have been at least partially in error. Taking your advice to check (to check again, that is, as I had double checked before I posted before), the entry level iMacs were indeed $1199 with the last generation, meaning they are still priced the same today, in terms of Good, Better, Best.

The Power Macs, though, started at $2799 with the last generation, higher than their 2006 price.  I remember being stupefied when Apple raised the entry level towers, but be that as it may, I am (almost!!!!!!!) positive the Mac Pro line is $300 cheaper at the entry level today than it was before March 4th, even if that is still the same price as 2006.

My apologies for getting the article wrong, and even more so for doing a poor job of double checking when you first posted.

I am editing the article now. smile

Bryan
Editor
TMO

jfbiii

“Apple has always been able to command a considerable premium over similar devices”

It’s hard to take this dude seriously when things like this are spitting out of his mouth. The fact has been for a long time that Apple, despite their margins, has offered machines at the top end of their chosen markets and has offered machines that compare very well with similarly configured PCs. When the PCs are priced in a way that you can charge Apple with charging a premium, it’s because they’ve cut corners to do it, and the specs aren’t the same after all. PC makers don’t want to offer machines at the top of various markets mainly because they’re competing for market share instead of profit share.

Props to the dave for noting that high-end manufacturers are different animals. Even as some of them offer products for lower-priced markets, they maintain their margins and compete at the high end with quality goods.

Nom

And this, of course, is why Apple isn’t about licensing OS X.  For a long time, Apple hardware has been decent spec-wise (although often innovating in industrial design).  The killer feature that enables Apple to sell it’s hardware at a premium is OS X, and the application ecosystem on top of it.

JulesLt

I’d concur with Audi and BMW, but not Ferrari, and maybe not even Porche. The reason being that Ferrari operate purely in a niche high-end sports market, while Audi and BMW are still ‘mass market’ brands - they advertise in magazines and on TV.

The key point is that German industry reacted differently during the 1970s - there was a recognition that competing with the Far East on price was going to be impossible, so there was a strong emphasis in investing in technology, and establishing a reputation for technical excellence.

In some areas they have lost their lead (no one really looks to Germany for A/V equipment in the same way they did in the 70s and 80s - Japan managed to overtake them there, moving from ‘cheap’ to ‘leading).

The other key point is that the German car firms have been through several recessions. They know that their sales fall during these periods, but have a confidence in their underlying business model - there is an upper middle-class who will pay a premium for reliability, technology.

Also that once converted, people rarely go back (having owned an AEG washing machine that is still functioning flawlessly after 11 years, I would never buy a cheaper brand again).

The market has always been able to sustain both models, and it’s ridiculous to infer anything permanent from current conditions (abnormal).

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