Ask Paul: November 24 (Premium)

Happy Friday! I'm finally done moving and traveling for a bit, so here's a great set of reader questions to kick off the long weekend.
Margins
Zeppelyn56 asks:

Paul, you have reported lately on the financial results from the likes of Lenovo, NVidia ana HP. Do you you ever think about the difference in the low margins these companies actually make as opposed to the sometimes near 40% margins the big tech companies (Apple, Microsoft and Google) enjoy? They sometimes seem obscene to me.

Generally speaking, hardware margins are much lower than those of software/services. And it's common for companies that offer both---hardware and related software/services---to lose money on the former and make money on the latter. This has been the reality of the Xbox, though Microsoft had always hoped to eventually make money on hardware through in-generation cost reductions, a strategy that never actually panned out. Which explains the Phil Spencer-era strategy pivots to acquiring more in-house game studios (to mimic Sony's more successful console model) and to subscription services.

This was also the model for the biggest PC makers until fairly recently (historically): IBM (now Lenovo) and HP are very different companies than they were in the heyday of the PC market, while Dell, oddly, remains largely the same. By which I mean, these are/were large, diversified companies that offer/offered a range of hardware, software, and services to both businesses and consumers, the idea being that a slowdown in any one area could be temporarily subsidized by other parts of the business. But the PC market experienced what was likely a natural byproduct of commoditization and then consolidation. And things are different now: PCs are very low-margin products, probably negative margin overall, and the only way these companies can be profitable now is with higher-margin premium PCs, which include business-class PCs, gaming PCs, and what we now call hybrid PCs (convertible/tablet/folding/etc. PCs).

IBM sold its PC business to Lenovo a long time ago, and if you look at that latter company today, you see what I'd call an electronics giant with footholds in PCs, phones, and related devices, and enterprise services and infrastructure (storage, etc.), and a solid presence with both consumers and businesses. HP split off from the enterprise software/services part of the original company (now called HP Enterprise, or HPE) and while we see it largely as a pure-play PC (and printer) company, and thus a hardware maker, it also offers businesses and consumers a range of complimentary subscription services related to security, remote access, maintenance/service, and more. And Dell remains what it was, a diversified company that targets both businesses and consumers with a wide range of options across hardware, software, and services.

When I write about those companies, I focus on what matters to us, meaning PCs, of course, but also whatever hardware, software, and serv...