An extended winter looming for OEMs

A combination of hardware and software factors are coalescing to test whether the OEMs of decades past can make it into the next one.
Written by Chris Duckett, Contributor

There's a very good reason why established PC and laptop brands are rushing head on into the world of mobility and wearables -- the traditional profits made by shipping computer hardware are drying up, and mobility is clearly the next big thing, and has been for some time.

For the vast majority of users, commodity hardware is more than capable of handling their workloads, and any performance problems can usually be put down to someone having an eye on the budget at some point in the purchasing process. The present situation, where adding more RAM into a system can result in a few more years of service, is a far cry from the time when beige boxes were regularly disposed of to keep pace with new operating systems and features.

As the pressure to upgrade hardware has subsided, PC refresh cycles have consequently extended. Last month, Gartner said it had seen PC sales fall 10 percent year on year, the steepest decline in two years.

In recent weeks, earnings from hardware manufacturers have shown the difficulty of the environment facing OEMs.

Taiwanese manufacturer Acer posted a wafer-thin NT$34 million ($1.1 million) in profit before tax for its second quarter, a drop of 90 percent from the prior quarter and 94 percent down on the same quarter last year. For the first half of its fiscal year, Acer posted NT$368 million in pre-tax profit, a fall of 45 percent, on NT$128 billion of revenue that fell 19 percent compared to last year.

Disturbingly for Acer, the drop in revenue was not in one particular product category, as each product maintained a similar percentage of sales compared to the second quarter last year.

(Image: Acer)

Even though fellow Taiwanese manufacturer Asus was able to report earlier this month that its revenue had grown by 4 percent since its second quarter last year to NT$99 billion, and that its net income fell 3 percent to NT$4.7 billion, digging into its results shows that mobile sales are making up for a drop in PC hardware -- with the company making NT$68 million in PC sales for the first quarter, but only NT$61 million in its second quarter.

The real lesson from its earnings, though, was that in three years' time, Asus believes it will garner more revenue from mobile devices than from PCs.

(Image: Asus)

But switching a company to focus on mobile is no guarantee of future profits -- just ask Samsung Electronics. After making the move from semiconductors to mobile phones, Samsung enjoyed a number of glamour years, but, once again, the semiconductor business is the profit driver.

Over the past 12 months, Samsung's semiconductor business has almost doubled its profit, while the mobile division has been in steady decline and seen its profit fall by almost 40 percent. Samsung's mobile problems consist of Apple stepping into the phablet space, and Samsung falling foul of its own undercutting tactics in China.

Despite gaining market share in the PC market the world over, Chinese hardware giant Lenovo saw its sales drop by 7 percent year on year for its first quarter. The company attempted to paint a rosy picture by pointing out that the industry as a whole had fallen 12 percent, but if Lenovo is making gains, another company is losing share in a contracting market -- it's not a pretty prospect.

Across the Sea of Japan, Fujitsu reported a ¥27 billion ($220 million) quarterly loss, mainly due to a ¥27 billion fall in its PC, mobile phone, and mobile-wear sales inside Japan.

"For PCs, revenue declined as the cycle of higher demand for upgrades resulting from the ending of support for an operating system had peaked in the first quarter of the prior fiscal year," Fujitsu said.

It's bad news for hardware makers when Microsoft drove a sales spike due to XP finally being put out to paddock, and systems currently running either Windows 7 or Windows 8 are capable of using Windows 10 for free.

Lacking a killer feature to spur upgrades, and by giving away its new operating system for free, Microsoft has taken away much of the drive of an upgrade cycle from its end.

Add in a skip from Intel in its traditional "tick-tock" cycle, when it will follow its 14-nanometre Skylake chip with the similarly sized Kaby Lake, rather than its intended 10-nanometre Cannonlake, and the impetus for users to move to new hardware has diminished even further.

And then there is the pressure from below applied by Chromebooks. Last week, research company NPD claimed that Chromebooks had surpassed Windows notebooks in B2B sales during June and early July. Chromebooks rarely arrive with the latest and greatest hardware, and show that buyers are fine with budget hardware. Even though the same OEMs exist between Windows and Chromebook platforms, its a lot harder to squeeze the same amount of profit out of selling $400 devices than, for instance, $2,000 ultrabooks.

As PC purchases continue to decline, tablet sales are in reverse, Intel is skipping a beat in its tick-tock cycle, and Microsoft is giving away free upgrades, the omens are not good for those hardware manufacturers that are solely focused on moving units.

With no game changer looming on the horizon, OEMs will need to try something else to keep shareholders happy, or they will find themselves in the hole HTC now finds itself in, with its core business regarded by the market as worthless.

ZDNet's Monday Morning Opener is our opening salvo for the week in tech. As a global site, this editorial publishes on Monday at 8am AEST in Sydney, Australia, which is 6pm Eastern Time on Sunday in the US. It is written by a member of ZDNet's global editorial board, which is comprised of our lead editors across Asia, Australia, Europe, and the US.

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