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Reading Tea Leaves From An Empty Cup

9/20/2010 10:23:00 AM

Stephen Baker is The NPD Group’s vice president of industry analysis. Please visit The NPD Group’s main blog page .

The last few weeks have been filled with reports that U.S. consumer PC sales are collapsing and that the iPad is to blame. Now that NPD has released August numbers we can take a look at the real story and the clear result is that trying to understand what is happening without the real numbers that NPD provides is folly. There is very little hard evidence that the iPad is killing notebooks sales and to say so represents the height of hysteria and speculation.

Windows PC sales, especially notebooks, have been much weaker than in the past few months, likely as much to do with the ebbing of the Windows 7 tidal wave and consumer reaction to the lack of price deals in the market this year as it has to do with iPads or back-to-school. Total Q1 notebook sales were up 28 percent but fell to 8 percent in Q2 as Windows notebook growth fell from 30 percent to 4 percent.

Notebook unit sales in July and August (the heart of back-to-school) were not great. Sales for those two months were down 1 percent versus 2009. Mac sales were up 15 percent and Windows notebooks (including netbooks) were down 5 percent. Certainly this is not what the industry had hoped (and maybe planned) for after the optimism generated by the holiday 2009 period’s 50 and 60 percent growth rates. But the BTS season has posted unit growth rates of 56 percent, 37 percent, 15 percent, and 30 percent over the last four years and sales were most likely to plateau at some point. So while it is apparent that growth is slowing, the fact that this slowdown coincides with the release of the iPad (well sort of) is hardly proof of cause and effect.

No one expected netbook sales to stay at the atmospheric levels of 2009 and in fact netbooks, as a percentage of U.S. consumer sales, have been very steady all year in the mid-teens. Netbooks sales are actually up for July and August 2010 versus the prior year period by 6 percent. In Q2, when the iPad launched and sold 3.3 million according to Apple’s financial statements, netbook sales were down around 8 percent but no one was forecasting the demise of the PC market at that time. Only in the last two months as reality has met expectations in the U.S. consumer market has this alleged cannibalization been cited

In light of the sales facts it is, in my view, a mistaken and absolutely untenable position to claim that PC sales are under pressure because of the iPad when there are so many other factors that are contributing to the poor results. And even if iPads will cannibalize netbook sales and some notebook sales as well, a position I don’t disagree with, I don’t believe it is happening now. It is hard to imagine that a flood of mass market consumers are switching from a product that has an average price of under $300 during BTS to one that had a ASP of over $600 in Q2, according to Apple’s financial statements. That is not how mass market consumers’ act, trading from a low-cost price segment to a high-cost one. With the current extremely limited distribution and high pricing compared to the alternative, it is difficult to believe that iPad has moved much beyond early adopters. It is much more likely that we are seeing the normal wave of early adopters, well-off technology hobbyists, and the curious buying iPads as an incremental technology purchase. In fact, NPD’s upcoming report Apple’s iPad Owner Study found that 13 percent of consumers who bought iPads said it replaced a PC purchase they planned to make.

To be fair, we are seeing slowing sales in some segments of the U.S. consumer notebook market. Again, it is not in the low-cost segment of the market, however, where the biggest concern seems to be. We have already shown that netbooks are performing acceptably, and we are seeing last year’s hottest segment, the under $500 full-size Windows notebook, post flat year-on-year results. This is only an indication of weak sales if you discount the 450 percent unit gain in the prior year. Where we have seen slowing sales is precisely the place we have seen sales slow for the past few years, the mid-priced $500-$1000 segment. In 2010 that segment dropped 11 percent vs. 2009, perhaps an indication that iPads, instead of cannibalizing low-end PCs, are actually taking sales from the mid-range. That a logical assumption would make sense except that these results are actually a performance improvement for that segment during the 2010 BTS season. In 2009 sales during the July/August period sales in this segment dropped 26 percent from 2008. Furthermore that 11 percent rate of decline is essentially unchanged on a sequential basis from Q2, when Windows notebooks priced between $500-$1000 fell 9 percent, causing us to wonder if even the early adopter purchasing during the initial iPad launch had any significant impact on PC sales.

None of this should be construed to make a case that NPD does not believe the iPad is a great product or doing extraordinarily well in the market. The tablet/pad market will likely be strong in 2011 and impact different segments of PC sales at that time. We will follow that trend closely and provide the industry with data to help it understand the impact, however, unless you have actual data making the claim that the iPad is destroying the PC market based on hearsay and innuendo is the worst case of rumor mongering. It is a clear case of expectations driving market speculation as opposed to fact. With data filling up your tea cup reading the tea leaves is extraordinarily easy, because there are always leaves inside.

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