The Consumer PC Market: Likely Outcomes In The Next 1-2 years

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Taking where we are today as a baseline and applying consumer usage scenarios and vendor strategies, let’s make a few predictions (after all, you can take the analyst out of the major analyst house . . . ). Note: I’ve excluded things that are guaranteed to happen, such as the iPad 3 (probably announced within the hour).

  1. Windows 8 dominates new PC sales by the end of 2012 . . . A fairly easy one; all indications are that Windows 8 will be in the market by the end of Q3 2012 or early Q4 2012. There is no reason to believe that the OEMs won’t just switch to selling consumer PCs with the new version on it (as they did with Vista and Windows 7). Even in a diminished PC market, this means that a significant number of consumers will be running ultrabooks (at the high end), mainstream laptops, and even netbooks with Windows 8 by the end of the year. One interesting question: will Microsoft bow to early feedback on the consumer preview and allow non-touchscreen laptops and desktops to have the Metro UI turned off?
  2. .  . . .but will have a slow start on tablets. However, Windows 8 x86 tablets are likely to be pricey initially (even compared to an iPad) and targeted at business; they do offer that full compatibility, after all. Consumers will be waiting until 2013 for reasonably priced x86 tablets. ARM-based tablets, however, will likely target consumers straight out of the gate (probably around the same date as the Windows 8 release), but OEMs will be cautious here; they were burned by their enthusiasm over Android tablets. Again, these devices are likely to be expensive compared to the rival devices available by this point (see below).
  3. Motorola/Google bring out an ‘optimized’ Android tablet. While still in the final stages of regulatory approval, all signs are that the Google purchase of Motorola will go through soon. While primarily being about ‘litigation replacing innovation’ (i.e., buying a bucket-load of defensible patents), this also gives Google its first foothold in the hardware space. Motorola’s Xoom tablets were already some of the best Android tablets — not a very crowded field, admittedly — and with extra resource and on-tap Google engineer access, they should improve even further. The real question is the extent to which Google is prepared to single out these devices and risk alienating other Android device manufacturers.
  4. Amazon intensifies its efforts with new devices and more geographies. The Kindle Fire is red hot (!) in the US, but hasn’t made it beyond that country’s borders. This is largely thanks to Amazon making efforts to create a more holistic ecosystem for the device — as Apple does; the tablet itself is no great shakes, being low-powered, lacking cameras, and having that love-it-or-hate-it 7-inch form factor. (Of course, if Apple does bring out a 7-inch iPad, then people will definitely love it.) Expect the Kindle Fire 2 by mid-year, potentially sold alongside the (even more) discounted original device, just as Amazon has done with its e-reader ranges. Geographic expansion is somewhat more problematic given that much of the device experience is based on Amazon’s back-end cloud services; these would have to be localized and comply with regional privacy and copyright law — far more tricky than turning out 10 million new devices from a factory in China!
  5. Intel drives the ultrabook message. Having been taken somewhat by surprise by the rise of ARM architectures in computing devices rather than just phones, Intel will continue to push the envelope in terms of performance, power usage, and form factor for its x86 family. Front and center will be the drive to create the ultrabook category as a viable alternative to the MacBook Air; while the Apple Macs use Intel chips, Intel stands to sell far more if the other OEMs can up their game with premium laptops (and premium Intel components). These premium products are hitting the market at a bad time for consumer spending though, so it will take some time for ultrabooks to reach critical mass.
  6.  Apple “merges” iOS and OS X. This is contentious — and not just because you’re looking at different architectures, UIs, and usage scenarios today. Could ARM architectures run OS X? Yes, apparently. Would it make sense to have iOS on a Mac? Probably not. Regardless of the underlying OS — and a full merge is still a long way off — Apple will certainly merge the look and feel of its two OS offerings and increase interoperability. Adding touchscreens to Macs will be the first step here.
  7. PC retail doesn’t get any easier . . . Consumer PC retail on the high street, like many non-essential retail markets, has been a difficult business since the recession. The increasing strength of Apple’s own retail channel is creaming off some of the more profitable transactions, leaving retailers to second-guess the next hit product. (Hint: it wasn’t Android tablets, and it won’t be ultrabooks for some time.)  They can’t even rely on software revenues because . . .
  8. . . . app stores continue to gain in importance. As more devices ship without physical media drives (e.g., tablets, ultrabooks), the emphasis on getting new software will automatically shift to downloading. App stores offer a great one-stop shop for this. Google, Apple, Intel, Valve, and EA (in gaming) already run these, and Microsoft is placing a lot of emphasis on this with Windows 8. Developers, particularly small ones, will face the difficult choice of switching to an app store (from their own digital distribution model) and putting up with a vetting process and someone taking a cut — or risk being sidelined.
  9. Consumers’ cloud adoption alters the dynamics of local devices and local storage. More on this in another post, but this is the situation in brief: more services streaming media or offering cloud storage combined with rock-solid connectivity move the needle on what components devices need to have built in. A smaller, faster SSD storage component should be adequate if all your music, photos, and video live in the cloud; similarly, you don’t need to install gigabytes of Microsoft Office on your PC if you can manage with something like Office 365.

Consumer Usage Scenarios: ‘Computing’

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While they’re not usually as focused as business users — whose approach is rather more “It’s my job to do task A, then task B by the end of the day” — consumers’ computing behaviors tend to fall into the following broad categories:

  • Consumption. This usually means the consumption of linear media: watching videos/movies, listening to music, reading books, general web surfing. In general, the three key criteria for a consumption device are an adequate display, good audio (mainly for music), and an easy-to-use user interface (UI).
  • Communication. Fairly self-explanatory, this involves anything related to making a connection with another person or people — one-to-one or one-to-many. This includes traditional applications like email, voice calls, and messaging, as well as some of the newer tools like social networks and Twitter. Again, the device needs to be as easy to use as possible — preferably blending into the background – and always having it with you is a plus too.
  • Interactive entertainment. By this, I mean gaming — a reliable usage scenario for most devices, ranging from humble smartphone games to sophisticated home consoles. This is pretty much the only usage scenario where software (i.e., the games) generates significant direct revenues from end users. The more powerful the device, the better it can present games – though this can be negated by compelling gameplay.
  • Transactions. Here, eCommerce and online banking are the most widely used applications. Generally, while these tasks are not much fun, they need to be done and can usually be done much more efficiently online. Robust connectivity is needed here, along with compatibility with the (secure) application being used.
  • Work-related activities. A minority of consumers also use their own devices for work or to support study. Compatibility becomes key; whatever device they want to use must be compatible with an employer’s system or school/college systems.
  • Life stuff. This is something of a cross between work activities and pure transactions. Think of this as achieving those little daily tasks, such as creating posters for charity sales, keeping a family calendar updated, or coordinating holiday arrangements. The ability to print is often important here, as is giving multiple people the ability to access and edit these tasks.
  • Creation. Held up (rightly) as the pinnacle of consumer usage, this ranges from simple tasks like assembling a photo album to writing a blog or book and even to music or video production. Creation may involve specialist software, and often has an engaged online community to get involved with for support and advice.

Another axis can be applied to all of the above: How often do you perform these tasks? Daily, weekly, once a year? For instance, if you only need to create and print a note once a year, you wouldn’t pick a device based on that as a core need.

When many of these tasks, regardless of the category, required local software and storage, consumers would opt for a PC. However, the emergence of single-function devices (e.g., DVRs, eReaders) that excel at just one thing offer real alternatives as do smartphones and tablets, particularly for content consumption and communication — two of the most popular consumer activities.

The above table takes a crack at rating general-purpose device options by usage scenario. The PC still has the edge overall, but notice that other devices edge it out in some of the more popular scenarios.

So, given this multitude of consumer motivations and scenarios, where does the industry go from here? I’ll make my predictions in the final post in this series.

What Motivates Consumers When Buying Computing Devices?

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It’s one thing to look objectively at the functionality, security, and flexibility of various ‘computing’ platforms — I’m being very careful not to use ‘PC’ here — and draw conclusions from those in terms of what a consumer will opt for, but you can end up with poor results: “The iPad is just a big phone, and it’s more expensive than a budget PC — of course people will opt for the latter!” Consumers — at least mainstream consumers — are rarely this rational or objective. Sure, they care about price and connectivity — in many cases, the quality of their 3G or home broadband connection is more important than the device — but they probably care more about design, peer advice, and their personal usage scenarios than the quality of the components or closed versus open ecosystems.

We can broadly categorize consumer considerations as follows:

  1. Price. Traditional PCs have always been an expensive investment for most consumers; the short-lived netbook market demonstrated that people can do many of their daily tasks on much much cheaper devices. In a period of global recession, when many consumers are ‘making do’ with existing devices, price is even more important. While the iPad has managed to retain Apple’s price premium, other tablets seem to have a sweet spot of around $200 — far below the manufacturer breakeven point in most cases.
  2. When the price isn’t the price. Mobile bundle deals often muddy the waters; getting a Samsung Galaxy II for ‘free’ on a £32-a-month contract for 2 years hides the fact that the device alone costs around £420 in the UK. “Sure,” the consumer reasons; “I’m paying £768 in the end . . . but I’d pay that for my minutes, messaging, and web access anyway.” Netbooks were a major beneficiary of this kind of bundling a couple of years ago, especially in the UK, which is why they did particularly well there for a time.
  3. Design, appearance, and store placement. A large part of Apple’s success is down to how good the devices look and feel when you play with them, either in a store or with a friend’s device; however, few other brands have the luxury of Apple’s margins to push the boat out on design and materials. In-store, the position of devices can make all the difference: 15 similar-looking laptops running Windows is not inspiring; it’s daunting! The same applies to 5 barely different Android tablets or 25 42-inch TVs. This is why manufacturers are increasingly trying to get their products in front of consumers in new ways: pop-up stores, limited editions, tied to a successful brand like Beats, and direct sales (or at least direct pre-sales). All aim to make a product stand out from the crowd, but some brands have discovered that the most powerful tool is . . .
  4. Peer pressure and recommendations. Social media gurus (warning: NSFW!) have long known about the power of peer recommendation, and consumer technology is an area where a friend or relative’s experience or expertise can heavily influence the decision to buy. Naturally, this works both ways; lousy experiences with a brand or product are, if anything, communicated far more readily.
  5. Legacy or compatibility factors. This is certainly a key factor in the business world, but consumers also worry about application compatibility and legacy issues. “Can I plug my printer/camera/iPod into device X?” “Will the kids be able to produce homework in the school’s specified format?” “Where does my master address/contact list live?”

When a consumer can connect any ‘computing’ device — be it a smartphone, a tablet, or a PC —to the same services, what she wants to do (or even thinks she wants to do) becomes perhaps the most important factor. In my next post, I’ll look at consumer usage scenarios for computing devices.

The Consumer PC Market Today

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For almost 20 years, home (and business) computing has pretty much amounted to one choice: X86 (probably Intel)- based hardware, running a version of Windows. It’s only in  the past 1 to 2 years that we have started to see some real alternatives:

  • Apple’s continued growth of its Mac business. It’s still very much a ‘niche’ player compared with the Windows PC market as a whole, but oh what a niche! Apple controls the entire ecosystem with high margins, world-leading designs, and revenues from all elements of the ecosystem (hardware, software, accessories, and content). Plus, that Windows market is split between 5 to 10 global players, dozens of regional ones, and hundreds of local assemblers — looking at them individually,  Apple is no longer so ‘niche’. It’s No. 3 in terms of Q4 2011 US PC sales and probably between 6th and 8th place globally for the quarter (according to combinations of Gartner and Canalys data — not something I’d recommend doing other than to illustrate a point!).
  • The rise and rise of tablets. Again, Apple’s role here cannot be overstated; the original tablet PCs and, looking even further back, PDAs had managed to carve out small niche markets but were always too underpowered or overpriced to cross the chasm to reach a mass market. The iPad changed all this; a beautifully designed content consumption device (again tied into the Apple ecosystem), it demonstrated that the flexibility and power of a PC (whether Mac- or Windows-powered) was overkill for a lot of tasks and people. Naturally, Apple’s success has bred competition, but aside from a couple of devices — perhaps even only the Kindle Fire — these haven’t really hit a home run yet.
  • Google dabbling with Chromebooks while getting serious about operating systems. Chromebooks are still in the starting blocks, but they may ultimately demonstrate the merits of simpler devices. Chromebooks basically do away with pretty much all local software in favour of cloud services accessed via a browser. If Chromebooks are an aspiration for Google, Android on smartphones and Android-powered tablets are concrete success stories for the search giant. Amazon’s Kindle Fire will probably guarantee Google’s OS overtakes iOS as the most popular tablet OS, as it has done with smartphones. There isn’t much money in this for Google — arguably, the reason it has got so far so fast is by giving away its OS — but it does provide many more devices tied into Google’s ecosystem (Gmail, apps, search) and therefore more advertising opportunities.
  • Microsoft embracing ARM-based hardware. This is perhaps the most interesting area for speculation at the moment (and I’m sure I’ll add my voice to this at some point). The success of the iPad has led Microsoft to look at the ARM architecture more seriously; what was previously too underpowered is now seen as a way of slimming down form factors and delivering superior battery life. That the ARM architecture has developed incredibly fast over the past 2 years thanks to the smartphone market and other tablets hasn’t hurt either. Will Windows ARM tablets be full PC replacements? It’s too early to tell, but probably not; Microsoft won’t want to kill the revenue streams of its other software offerings like Office, and these products are unlikely to command the same price from consumers when offered via a Metro-UI-based app store.

All of the above means that the next 1 to 2 years will be an unprecedented period of change and competition in the PC space — and consumers will be at the forefront of this change; business users are typically slightly more conservative in embracing new platforms. Hardware and business models are only really half the story; we also need to consider what matters to consumers when buying a new ‘computer’ (whatever that may come to mean) and what usage scenarios really play into this. I’ll be looking at both of these in my next posts.

So . . . what’s with the name?

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When discussing my new venture with friends and colleagues, this in one of the first questions I get — which is perfectly valid, given that it’s not an obvious choice. Essentially, in choosing AardvarkA as my company name, I was driven by two things:

1) I really didn’t want to be ‘Jackson Research’ or ‘PJ Consulting’ — partly because those names/domains were already taken (darn you, common surname!), but mainly because I’ve bumped into too many analysts who have set up their own, eponymous firms and with one exception — she’ll know who she is — they have all been unbearable.

2) I have had a long-term obsession with Cerebus the Aardvark by Dave Sims and Gerhard.

Largely coincidentally, it’s also a great YPO (Yellow Pages optimization) name — you’ll almost certainly be at the top of any alphabetical list. That’s why there are so many ‘Aardvark Plumbers’!

Gamification: The New Virtual Worlds?

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Six years ago, I was caught up in (and probably contributed to) the hype around virtual worlds — environments typically built using videogaming technology for training, meeting, or social interaction and entertainment. Second Life (which is still going, believe it or not) was the best known of these. For consumers, the main problem with many of these worlds was that they lacked clear goals — making it difficult to retain a critical mass of engaged users, especially given the limitations of keyboard and mouse control of 3D avatars. (Some of the games that could be classed as virtual worlds, such as World of Warcraft, Star Wars: The Old Republic, and even Minecraft,  work well because of their compelling stories and user-engaging goals. Perhaps we’ll see a successful second wave of virtual worlds as voice/motion control UIs and 3D displays create a more immersive experience.)

Anyway, I was reminded of the above when looking at the newest, hottest “videogames-without-the-actual-game” topic of gamification. While the idea behind gamification is not as fundamentally flawed as that of virtual worlds (ain’t hindsight great!), the field is developing in a very similar way:

1) A couple of visionary firms start “gamifying” their consumer interactions — Mint is a great example here.

2) Other firms jump in with either their own offerings or infrastructure to support gamification — see Badgeville for a good example of the latter.

3) Breathless articles start appearing in the press about how gamification is going to be BIG! These are usually accompanied by new conferences springing up to support the field. See No, Second Life not overhyped versus Inside the gamification gold rush. Ahem.

4) Brand marketers jump in, all hoping that this will give them an advantage — albeit temporary — over their competitors in consumers’ eyes.

5) Profit?

Now, I recognize that being around cutting-edge technology for as long as I have can make you cynical, but I think it’s clear that gamification is not the panacea that many marketers hope it will be. From the consumer’s perspective, we have:

  • The good: Making mundane tasks more interesting is a good thing; setting and achieving goals and sharing experiences makes ongoing commitment more likely — as WeightWatchers knows well. And there are few areas as dull and ripe for sprucing up as personal finance, professional networking (see the BeKnown Facebook app), or regular shopping trips. Gamification is win-win here.
  • The bad: But, as with ‘following’ a product, how many of these different games, badges, and groups can consumers really stomach? Early-adopter brands may gain a fleeting advantage, but competitors will copy them — often at a fraction of the cost, given all the new tools. That’s the reality of modern marketing.
  • The ugly: You the consumer start ‘playing’ a personal finance service, love it to bits, and recommend it to everyone you meet. The trouble is that most other people don’t bite, so the service is shelved (virtual worlds hit a similar stumbling block here); you’ve spent hours getting badges/points/custom items, all of which will shortly vanish. Now, how does that make you feel about the brand concerned?

I’ve experienced this last point first hand recently. I’m a big fan of Japanese role-playing games (JRPGs) in general and the Final Fantasy series in particular — so I jumped at the chance to start playing Square Enix’s Knights of the Crystals Facebook game around 2 years ago and have been dutifully building my characters pretty much every day since. But at the end of this month, it is closing down — and I feel like I’m losing a friend! (I certainly spent more time on it than with any of my real or Facebook friends over the past couple of years.) Before jumping on the gamification bandwagon, marketers need to think carefully about the long-term sustainability of their game — or risk alienating their most engaged  followers.

It is good to be back

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So, after two years of working for Microsoft, I’m back on the industry analyst side of the fence. Exciting times – especially as I’m doing my own thing this time instead of working for a big analyst house like Forrester. In the coming weeks I hope to fill out this site more with some analysis, trends and what I hope to achieve with AardvarkA Research (including why the name!).