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As Microsoft rolls out its Windows 10 Creators Update and announces new Surface Studio apps, new reports on the state of the traditional personal computer market highlight the challenges the company faces, particularly in consumer PCs.

A report from market research firm Gartner says the global PC market declined 2.4 percent in the first quarter, compared with the same period last year. Meanwhile, the IDC Worldwide Quarterly Personal Computing Device Tracker report finds that the PC market grew very slightly (by 0.6%) over the same time frame.

 

Softness in the market for consumer PCs, which both IDC and Gartner say is an issue for PC makers, could be a real issue for Microsoft with Windows 10 Creators Update. Many of the features in the update are aimed squarely at consumers, rather than business and enterprise customers.

The Windows 10 Creators Update, for example, includes improvements to the built-in Windows Edge web browser, plus the addition of eBooks to the Windows Store. It also adds a new “Game Mode” to improve the performance of games running on consumer PCs by allowing them access to greater resources.

According to Jay Chou, research manager for the IDC report, there isn’t a lot in Windows 10 Creators Update that will drive hardware sales for consumer PCs. He says that for the user of what he calls a mainstream PC, such as a 15-inch notebook that “isn’t light and doesn’t give you great battery life and sells for $400 to $500,” it won’t make a huge difference.

“Those are the PCs that people are not in a hurry to upgrade,” he said in an interview with GeekWire. “I don’t think Windows Creators Update is going to change that.”

Mikako Kitagawa, principal analyst at Gartner, suggested that the consumer market for PCs will continue to shrink and it will be makers of business PCs that will survive.

“Vendors who do not have a strong presence in the business market will encounter major problems, and they will be forced to exit the PC market in the next five years,” although she added that specialized ‘niche players’ who make gaming or ruggedized PCs, for example, could continue to enjoy growth.

Consumer PCs have thin margins

According to Tim Bajarin, president of San Jose-based market research firm Creative Strategies, one of the big challenges for makers of consumer PCs lies in making any real profit from them.

“Keep in mind that nobody makes money on the low end PCs for consumers, including Chromebook,” he said. “However, there is still demand for consumer PCs and these will always be price sensitive. All PC makers are creating top of the line PCs for their business customers and that is where the profits are. There is no money in consumer PCs and any company only focused on this market will have trouble keeping their companies viable.”

Another factor identified by both Gartner and IDC is the rising cost of DRAM (dynamic random access memory) and SSD (solid state drive) components, which Bajarin says is made more acute by their use in smartphones and tablets. “There are component shortages in some areas since many of these same components in one form or another are also going into smart mobile devices,” he said.

Both IDC and Gartner agree that the market share for the world’s top 3 PC makers (HP Inc., Lenovo, Dell) has been growing at the expense of second tier PC makers. Gartner says the PC makers that survive will be those that target the growing business market.

Dell, which is listed as the world’s third-largest PC maker in both reports, said in a statement to GeekWire that it is seeing the same kinds of consolidation as Gartner and IDC.

“The top three players in the PC market have nearly 60% share today; we believe that number will surpass 75% by 2020, all due to market consolidation,” a Dell representative said. “The numbers are not only an indicator of this shift, but they also point to which companies will win in a consolidating global market.”

Impact to Microsoft’s bottom line

Al Gillen, vice-president for software development and open source at IDC, says that he could see the pressure on consumer PC sales hitting Microsoft’s bottom line when the company announces quarterly results on April 27. The Windows client operating systems and Surface hardware lines are in Microsoft’s More Personal Computing segment.

“That portion of Microsoft’s business has been struggling to gain solid footing for some time,” he said, noting that a shift in the way Microsoft recognizes revenue for Windows 10 “only made the situation worse.”

When Microsoft originally introduced Windows 10 in July of 2015, it changed from having a revenue model that “recognized” all the money it received from a sale of a copy of Windows (whether as a standalone upgrade or when sold with a new computer) at the time of sale.

The company changed that approach to recognize revenue over time, since Microsoft would be upgrading and adding to Windows 10 (rather than making consumers buy a new version of Windows when they wanted new features).

Microsoft has announced that it will be changing its revenue recognition model again for Windows 10 and that, as of July 1, 2017, it expects to “recognize Windows 10 revenue predominantly at the time of billing rather than ratably over the life of the related device.”

That means Microsoft will once again get credit for almost all the money it receives for a copy of Windows 10 at the time it makes the sale (regardless of whether it’s pre-installed on a PC or is purchased as an upgrade to a previous version of Windows).

With that change now on its way, Gillen says the impact of Windows 10 revenue should soon be easier to see. He said that during the previous quarter, the “More Personal Computing” segment of Microsoft’s business (within which Windows 10 sales are reported) was down 5.2% year over year. But he reiterated that since this segment is responsible for a big chunk of Microsoft overall revenue (about 46%), its performance is still very important the company.

In addition, Gillen said that since Windows 10 is recorded within a group that has some other popular products, the number for this group may not tell the whole story. “Let’s remember that also included in this segment is gaming and hardware revenue (including Surface devices), which are, generally, healthier than the Windows Client OS market business,” he concluded.

Bajarin agreed that Microsoft has made some smart moves in other areas that could help it offset declines in sales of consumer PCs.

“Windows is not going away anytime soon and Windows 10 has picked up some important momentum in the last year,” he added. “But Microsoft’s real money makers are their subscription apps and cloud services that can be run either through an app or on the Web and that part of their business keeps growing. I also see them really innovating in areas like gaming and mixed reality, something that if they get right will only keep them growing.”

Dell, not surprisingly, says that it still sees strong growth ahead for Windows – although the mix of Windows devices that customers buy will likely to continue to evolve.

“The slate tablet market is oversaturated and is experiencing declining demand from end users,” said the Dell representative. “Additionally, the 2-in-1 with larger screens in the 10- to 12-inch range are offering a ‘laptop first’ experience with the convenience of a tablet when needed. This is where our customers are asking us to invest and innovate.”

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