PC gross margins expected to decline as sales shrink, Dell goes private

Posted:
in Current Mac Hardware edited January 2014
The struggling PC market is forecast to go from bad to worse, as one analyst believes a number of market factors will push gross margins even lower in the already-cutthroat business.

Deutsche


"PC profitability is the next shoe to drop," Chris Whitmore of Deutsche Bank declared in a note to investors on Monday. He believes that pricing the PC market will become even more aggressive over the next few years, a trend that could be led by a newly private Dell.

Whitmore expects that overall PC sales will be down 8 percent this year, and 5 percent in 2014. He believes tablets, like Apple's iPad, will continue to chip away at sales of traditional computers.

The analyst cited an internal letter from Michael Dell that leaked earlier this month, in which the CEO suggested he plans to pursue growth at the expense of gross margins.

A private Dell without expectations from Wall Street would have "considerable flexibility to lower margins," Whitmore said. This would allow the company to grow and drive a scale advantage over its competitors.

"Consequently, we foresee a sharp increase in competitive dynamics in the PC market, which could result in greater profit declines across the industry," he said.

PC
The top five PC makers in the U.S. by market share last quarter, according to IDC.


Whitmore's negative outlook on the PC market comes on the heels of the steepest quarterly decline ever seen by IDC in tracking estimated PC sales. The latest data released last week found that the overall market declined 13.9 percent year over year in the first quarter of 2013.

Apple's Mac lineup has not been immune to this trend, as the company saw its sales dip 7.5 percent year over year. IDC's estimate for the March quarter follows a 17 percent drop in Mac sales that occurred during the prior holiday quarter.

Whitmore's take joins another bearish view shared last week by Maynard Um of Wells Fargo, who said he believes the PC industry is headed for a major shakeup in the coming years. He expects that some of the biggest players will begin to consolidate, leaving fewer companies controlling larger shares of the industry.
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Comments

  • Reply 1 of 30


    So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?

  • Reply 2 of 30
    sflocalsflocal Posts: 4,674member
    The PC industry will continue falling so long as they keep putting out the garbage products that they have been selling since forever.

    Thank you Apple for proving all the haters wrong. People want quality and service and have shown time-and-time again that people will pay that little extra for it.

    What a concept.

    Good riddance to the naysayers and losers.
  • Reply 3 of 30
    mstonemstone Posts: 11,510member


    As long as Apple still makes computers I'll be happy. Of course I would be happier if they made a new Mac Pro. Nevertheless no tears will be shed over Windows PC declines.


     


    I do need to be able to build my kick ass Linux servers though. Lately I've been building 2U machines with Supermicro boards/cases and dual quad Xeons. Those are some real workhorses.

  • Reply 4 of 30


    I remember back in the day Dell was the machine to have.  Then, they started yanking out all the parts that made the machine upgradable, and went south from there.  Their service was also state of the art for a while, and then same issue, just went down hill.

  • Reply 5 of 30

    Quote:

    Originally Posted by sflocal View Post



    The PC industry will continue falling so long as they keep putting out the garbage products that they have been selling since forever.



    Thank you Apple for proving all the haters wrong. People want quality and service and have shown time-and-time again that people will pay that little extra for it.



    What a concept.



    Good riddance to the naysayers and losers.


    Bingo! :)

  • Reply 6 of 30
    lilgto64lilgto64 Posts: 1,147member

    Quote:

    Originally Posted by Applelunatic View Post


    So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?



     


    Because then you survive while your competitors fold or merge - and when the market changes or you figure out how to make high margin highly desirable products then you are still around to make your comeback (if all goes well). 

  • Reply 7 of 30


    Just a reminder  Anyone who partners with Microsoft will either suffer for a long time or completely die.


     


    Eg: Seattle Computing, Sega Dreamcast (Used WinCE and got destroyed with licensing fees, then XBox comes out) , OS/2 (Stealing tech for Win3/95) , Apple, IBM,  PlaysForSure, the hundreds of PC OEMS whose names we forgot.  


     


    And this has nothing to do with FUD, or the pure evil they did to kill competitors like BeOS.


     


    Thank the DOJ for making M$ pretend to like Apple and not kill them completely.  


     


    Also thanks, to Apple for creating Safari and iWork and turning the tables around on Microsoft.


     


  • Reply 8 of 30

    Quote:

    Originally Posted by lilgto64 View Post


     


    Because then you survive while your competitors fold or merge - and when the market changes or you figure out how to make high margin highly desirable products then you are still around to make your comeback (if all goes well).



    You don't survive your competitors by making little to no profit.  The only time when such tactics as you specify works is when you have something else to prop up your (near) loss leading effort in another market.  Or when you happen to be more efficient than your competitors and can still make a higher margin even at lower costs.  Dell has no other market that they are hugely profitable in in order to subsidize making thinner margins and they are clearly not more efficient if they have to lower margins to compete on lower price.  It's a ridiculous strategy for a company that is already making less and less profit by the quarter.

  • Reply 9 of 30
    All this changes nothing. Apple is still doomed and its share price is still imploding. Apple was in second place to the Windows PC industry but now it is in second place to Google's Android OS in the smartphone industry. Apple can only manage a weak second place in everything it pursues. Apple shareholders must brace themselves and be prepared for an April 23rd bloodbath when Wall Street tears Apple apart from missed expectations to weak future guidance. Apple shareholders will think Apple has been the company totally disrupted, not the PC industry.
  • Reply 10 of 30

    Quote:


    A private Dell without expectations from Wall Street would have "considerable flexibility to lower margins," Whitmore said. This would allow the company to grow and drive a scale advantage over its competitors.



     


     


    So in effect, Wall Street is no good for businesses, nor consumers.  Interesting.

  • Reply 11 of 30
    mstonemstone Posts: 11,510member

    Quote:

    Originally Posted by Constable Odo View Post



    All this changes nothing. Apple is still doomed and its share price is still imploding. Apple was in second place to the Windows PC industry but now it is in second place to Google's Android OS in the smartphone industry. Apple can only manage a weak second place in everything it pursues. Apple shareholders must brace themselves and be prepared for an April 23rd bloodbath when Wall Street tears Apple apart from missed expectations to weak future guidance. Apple shareholders will think Apple has been the company totally disrupted, not the PC industry.


    If Apple is such a second rate company, why are the so called winners like Google and Microsoft trying everything they can to copy them? I'm not in AAPL right now and perhaps it is still overbought but I still like Apple products more than any other brand

  • Reply 12 of 30
    umrk_labumrk_lab Posts: 550member


    The only intelligent decision is to run away from a business where, as L Ellison said, "one third of the profit goes to the chip maker, and another third to Microsoft" (the "one third" turning into 50%, as the global margin shrinks, and neither the chip maker nor Microsoft are willing to take it into account). This is why IBM decided to quit this business.

  • Reply 13 of 30
    That's the problem with a race to the bottom: eventually you'll get there.
  • Reply 14 of 30
    gazoobeegazoobee Posts: 3,754member


    Wow, a series of declining quarters, finishing with the worst quarter in history ... and they say that "trouble might be ahead."  


     


    These guys are geniuses!  image

  • Reply 15 of 30
    richard getzrichard getz Posts: 1,142member

    Quote:

    Originally Posted by Gazoobee View Post


    Wow, a series of declining quarters, finishing with the worst quarter in history ... and they say that "trouble might be ahead."  


     


    These guys are geniuses!  image



     


    That's why they get quoted here often :P 

  • Reply 16 of 30
    gazoobeegazoobee Posts: 3,754member

    Quote:

    Originally Posted by Applelunatic View Post


    So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?



     


    I agree that it's mostly business double-speak but the theory here is that the market is shrinking dramatically, so a lot of the current players will be history soon.  


     


    Dell is not so much hoping to "making it up on volume" as he is hoping to be in the correct position to eat up all the other fishies in the pool, as the draught continues and the pool gets smaller and smaller.  Then when he is the only one left, margins grow again.  


     


    Seems like a wild bet, and only an insane person would invest in this strategy IMO, but there are more than enough "players" (to those who think they are), in the market to finance such a deal.  I'm pretty sure that once the dust has cleared and the industry has consolidated, and there is only one or perhaps two PC makers left in the world, that neither of them will be Dell.  

  • Reply 17 of 30

    Quote:

    Originally Posted by Gazoobee View Post


     


    I agree that it's mostly business double-speak but the theory here is that the market is shrinking dramatically, so a lot of the current players will be history soon.  


     


    Dell is not so much hoping to "making it up on volume" as he is hoping to be in the correct position to eat up all the other fishies in the pool, as the draught continues and the pool gets smaller and smaller.  Then when he is the only one left, margins grow again.  


     


    Seems like a wild bet, and only an insane person would invest in this strategy IMO, but there are more than enough "players" (to those who think they are), in the market to finance such a deal.  I'm pretty sure that once the dust has cleared and the industry has consolidated, and there is only one or perhaps two PC makers left in the world, that neither of them will be Dell.  



    Yes, but to actually be able to survive you have to be able to make money.  Which as I said in the other post means you have to be able to either subsidize these margin cuts with some other business that is making enough profit to cover or you need to be more efficient so lowering your costs doesn't lower your margins. I don't see Dell having either of those and thus it looks like this will do nothing but further accelerate their profit margins going to 0 and under.  Do they really have enough spare cash to burn through long enough?

  • Reply 18 of 30
    paxmanpaxman Posts: 4,607member

    Quote:

    Originally Posted by Suddenly Newton View Post



    That's the problem with a race to the bottom: eventually you'll get there.


    Wow - Acer has not got far to go. 1% net profit margin? Woah.

  • Reply 19 of 30
    jeffdmjeffdm Posts: 12,946member
    I thought the Dell deal still had to be approved by shareholders. I didn't see that anywhere.
  • Reply 20 of 30
    Also thanks, to Apple for creating Safari and iWork and turning the tables around on Microsoft.

    IE6 was once heralded as the end of the World Wide Web. Microsoft at one point said there would "not be an IE7". Now look at them: complaining about WebKit becoming the "new IE6." My how the tables have turned.
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