Health of Tech: The PC Industry

The PC industry has been shrinking for several years, and while the reasons are clear, many questions remain. Key among them are whether this shrinking is a permanent condition, or whether the PC industry plateaus at a new if lower level.

Generally speaking, I do expect the PC market to continue to contract over the long term, and Microsoft, Intel, and their PC maker partners have all issued guidance to support this opinion. So the question isn’t whether it is happening, but rather at what speed it happens.

To help understand the future, it helps to examine the past.

Through 2011, the PC industry saw regular growth, with PC sales jumping from 239.2 million units in CY2006 to a high of 365.5 million units in 2011, at least according to Gartner. In those heady days, many expected the PC industry to hit the 400 million market. Ironically, it experienced its biggest sales bumps in the two years that Apple announced the products that would ultimately trigger the PC’s decline: 2007 (iPhone) and 2010 (iPad). In both years, PC sales grew 14 percent when compared to the previous year.

But it’s been downhill since 2011. PC sales fell to 351.1 million units in 2012, and just 316.5 million in 2013. By last year, the PC market fell to under 300 million units annually, and today PC sales are where they were about 8 or 9 years ago. That’s not healthy by any measure.

A number of factors contributed to this problem.

First and most obviously is the explosive growth of the iPhone and the Android smartphones that followed it: Apple has now sold over 1 billion iPhones, and there are more Android devices in use today than is the case with Windows PCs. This is the primary reason that the PC market will never fully rebound: Many tasks that used to require a PC no longer do.

Then we have Windows 8, which landed with a thud in 2012, exacerbating the problem. (The worst year-over-year loss experienced by the PC industry in the past decade came in the one-year period following the release of Windows 8, when sales fell 10 percent.) Yes, Microsoft should be credited with correctly understanding the impact that mobile devices would have on the PC. But its initial response was hurried, half-baked, and disrespectful of its customer base. As bad in some ways was Microsoft’s first foray into PCs with the Surface lineup, a decision that led to all of its PC maker partners adopting Chrome OS as an alternative to Windows.

Not helping matters is that PCs are now far more reliable than they were in the past. When you combine this fact with users’ shifting usage patterns—where more and more tasks are completed on mobile devices instead of PCs—you can see the problem: PCs simply last longer and don’t need to be replaced as often. This is true for both consumers and for businesses.

So the past trends are obvious enough, but the question remains: Will PC sales level off at some level and then maintain at that level, with short spurts of small growth, for the foreseeable future? I think that is possible, and when I look at the past two years of PC sales data—which is to say the previous eight quarters sequentially—what I see isn’t cataclysmic. And that’s a good sign for the short term.

Using two years of data from both Gartner and IDC, in this case, we see that the PC industry is 5 to 8 percent smaller than it was a year earlier, depending on the quarter. And with the exception of the first quarter of 2016, which saw a larger than usual shortfall compared to the year-ago quarter, it appears that the gap is closing. That is, PC sales look ready to level off.

Both Gartner and IDC are cagey about when this might happen, which makes sense given their terrible records at prediction. But just looking at the data, it’s not hard to imagine a late 2017 or early 2018 date at which the several year decline of the PC industry finally comes to a close. If temporarily.

That will be a welcome moment for people who care about PCs, not to mention for PC makers, Intel, and Microsoft’s Windows business. And if the rate of decline remains consistent—no guarantee, of course—then we’re looking at an annual run rate of about 250 million units when that leveling off does happen.

To adjust for this lower level of sales, PC makers are looking for profitable sub-markets within the PC industry. These include premium PCs of all kinds, including gaming rigs, and if you look at the devices companies like HP, Lenovo, and Microsoft are selling these days, you can see where they put the most effort.

That said, there are still challenges for the future.

The move from PCs to mobile will only accelerate over time as younger users rise through their school years and enter the workforce. And as older users who are accustomed to PCs die off or leave the workforce.

Too, Apple and Google are pressing forward with improvements to their mobile platforms—iOS, Android and Chrome OS—so that they can bring ever more PC users into the fold. This is happening because it can happen: As these systems mature, they can handle even more workloads that used to require PCs. And because the mobile market itself is maturing and slowing. So mobile platform makers see the billion-plus PC user base as an opportunity for growth.

And then there’s Windows 10.

I feel that Microsoft did an incredible job of transforming the Windows 8 disaster into something that truly answers its customers’ needs. They did so first with the baby steps in Windows 8.1, and then more dramatically with Windows 10, which presents a single platform that spans an ever-growing multitude of device types.

But Windows 10 has been hobbled by a number of factors, only some of which are Microsoft’s fault: Bogus privacy fears, lingering hatred of Windows 8, an overly-aggressive upgrade push, and more. These issues are probably well understood, but more interesting, I think, is Microsoft’s public prediction of one billion users, and what this really says about the future of the platform and the PCs on which it runs today.

As you probably know, Microsoft once pledged that Windows 10 would be in use on over one billion devices by mid-2018, but then revealed this past summer that it would miss this time line. (The firm still expects to hit the one billion devices mark, but just later than originally expected.) Some pundits have blamed the Windows phone on this shortfall, as if that platform’s failings only suddenly became obvious in mid-2016. But the fact remains that Windows 10’s success is tied almost solely to the PC market. Because the other devices on which it runs—phones, Xbox consoles, IoT devices, HoloLens, and Surface Hub—will simply never amount to a big percentage of that one billion figure. Most of it will have to come from PCs.

Microsoft says that there are about 1.5 billion PCs in use around the world. And though that number hasn’t been revised in years, the Windows 10 and NetMarketShare usage numbers suggest it’s still roughly accurate.

NetMarketShare usage data shows us that Windows 10 constitutes 22.53 percent of all PCs in use at the time of this writing. We know that there are 400 million active Windows 10 devices worldwide, but that figure includes non-PC devices, including about 20 million Xbox One consoles. How many of the 400 million devices are not PCs? 50 million? If there are 350 million Windows 10 PCs worldwide, then the total number of PCs is 1.55 billion. (The math: 350 million is 22.53 percent of 1.55 billion.)

So for Microsoft to achieve that one billion active devices milestone for Windows 10, it will need to wring 650 million additional installs of Windows 10 from the audience that is currently using older Windows versions. (Or, less than that, really: New Xbox One consoles and other non-PC devices running Windows 10 will continue to sell as well, of course.) Today, 68 percent of PCs are running older Windows versions, or about one billion PCs. So Microsoft needs to convert two-thirds of existing Windows users to its latest OS.

Not helping matters is that two Windows versions, Windows 7 and 8.1, are supported through January 14, 2020 and January 10, 2023, respectively. When you considered that Windows XP is somehow still on almost 10 percent of PCs in the world, it’s fair to believe that Windows 7, in particular, will have some staying power past its expiration date. Point being, the migration to Windows 10 will happen, but it will be slow.

And I think that sums up today’s PC industry nicely: There is a still a sizable user base out there, but it moves slowly. Inertia will guide the short term, and it’s impossible to tell what market forces could arrive at any time to impact the long term.

Like many of you, my personal computing experiences continue to revolve around the PC. And because of my needs—as a professional writer, of course, but also other esoteric use cases such as graphics and video edit, software development, and virtual machines for testing—I expect to be using a PC for a long time to come. But I also acknowledge the change that is sweeping this industry, and the lasting impact it will have. Around me, around people like me, an ever-growing user base is discovering that they can dramatically lower if not eliminate their daily PC usage. And I only expect that trend to continue. As such, it’s something I’ll be paying close attention to going forward.