Of all our Baker’s Dozen Holiday predictions the one I am most confident in is that notebook sales will soar during the holiday, but those gains will come at a considerable cost in ASP. While we thought this scenario might play out as the holiday unfolded, our weekly data shows this price war has already begun, and the implications and challenges around a new level of Windows notebook pricing will reverberate around the industry.
During the last three weeks of October (October 5th -October 25th) we saw the lowest Windows pricing ever. All three weeks ASPs were below $430, with the week of October 5th showing an incredible $415 ASP for Windows notebooks. In contrast, the ASP last year at this time was around $480- a monumental change in pricing for a category that had seen stable pricing for the last few years. Yet, as is almost always the case, giving away your product has brought out the customers in droves. Unit growth during those first three weeks in October was 16 percent, 13 percent, and 1 percent, respectively; and during the last week of the month, despite just a 1 percent gain, Windows was the only OS to show unit growth over the prior year. All of this momentum is coming from PCs under $300.Growth in the under $300 segment during the first three weeks of October was 124 percent, 68 percent, and 88 percent respectively, over the prior year, continuing a streak of 15 consecutive weeks of double-digit Windows notebook growth for the entry-level under $300 segment. Black Friday pricing has clearly come very early to the Windows notebook market.
The implications of a much more price aggressive PC market are enormous, and while many of them are positive, many are not. Much of the impetus for the aggressive price reductions has been the Microsoft Bing program, a back-end subsidy for Windows PC OEMs designed to make entry-level Windows PCs more competitive with Chromebooks. To some extent this has worked. Last year at this time Chrome had captured a unit share in the high 20’s of the entry-level notebooks market, this year that share is now below 20 percent. Of course we would be remiss in not pointing out that while Chrome’s share has declined it has continued to post mostly double- digit unit increases.
This seeming success for Microsoft does not come without collateral damage. The Windows notebook PC segment above $300 has been decimated, with sales down 10 percent over the past three weeks. This has impacted the uptake of touch in the Windows market as well. Basic clamshell notebooks with touch only accounted for approximately 25 percent of the Windows market over the past few weeks, in contrast to points earlier in the year when it was above 30 percent. It has also impacted the 2inOne market which remains stalled at just 11 percent sales penetration. Finally, it is likely to change the tenor and composition of both the brands in the PC market and the retailers as well. This type of pricing war is likely to drive increasing amounts of volumes to the largest retailers, such as Best Buy and Walmart, and the largest brands such HP, who can withstand an extended period of such aggressive pricing activity.
With a Windows market delivering pricing at clearly unsustainable levels the real question is what does the Windows PC market look like when we come out of the holiday season, and what would a permanent decline in notebook ASPs do to the market ahead of the launch of Windows 10? I suspect the answer is a significantly weaker PC business, less able to support Windows 10, less able to compete with a surging Macbook market, and less able to clearly differentiate what makes a PC a compelling choice against a tablet or a smartphone.