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It is well known that sales of personal computers collapsed in the fourth quarter of 2008, but it turns out that declining average selling prices (ASPs) caused far more damage to PC vendors, according to data released by Technology Business Research, a market research and industry advisory firm. In order to end up profitable, computer makers have to offer valuable after-purchase services to their customers.

Combined, HP, Dell, Lenovo and Apple’s unit sales decreased only 5% year-over-year, however, their collective ASP dropped 13%, causing an 18% decline in PC revenues. Average selling prices have been declining over the long term, but the fall-off became steeper in 2008 and the bottom dropped out in Q4 2008.

“While the addition of netbooks to the product mix directly drove down ASPs, their presence in the market affected ASPs across the product spectrum. Netbooks showed both consumer and business purchasers that, for most uses, they do not necessarily need top-of-the-line PCs,” said Ezra Gottheil, an analyst for TBR.

It is especially noteworthy that ultra low-cost personal computers (ULCPCs), such as netbooks or nettops, do not represent a substantial share of the aforementioned companies’ product mix. As a result, this means that not only very inexpensive systems are driving ASPs down, but many customers started to save on more advanced machines.

TBR believes the decrease in ASPs is structural and permanent. The recession is driving customers to value-based decisions and they will retain the habit long after an economic recovery. Like the gasoline price shocks of 2008 and the 1970s, the recession is causing PC buyers to downsize.

However, there was some good news for vendors in the unit and ASP figures for Q4 2008. In a dramatic and frightening economic crisis, unit volume was down only 5%. TBR believes this demonstrates the price elasticity of the PC market. As prices plummet, the market expands, both by adding new purchasers and by current PC owners purchasing additional PCs. With useful PCs available at a much lower price point than ever before, unit sales would have mushroomed under typical economic conditions.

The decline of ASPs challenges PC vendors apart from the recession. Vendors typically have lower profit margins on lower-priced models. The lower-priced PCs are increasingly seen as interchangeable and disposable commodities, and vendors are having difficulty differentiating.

“To drive sales of more than one PC per customer, vendors must make it easier to manage data and programs on more than one PC at a time. The lower price point makes it difficult to profitably provide adequate and expected service and support,” said Ms. Gottheil.

TBR believes the PC market is changing radically. The company advices vendors to consider changing their relationships with buyers, establishing longer-term relationships and providing valuable paid services after the sale.

“No longer dominated by hardware or software, PCs are becoming a service business. The change in the market presents vendors with threats and opportunities. Companies that can figure out how to embrace this trend most quickly and profitably will emerge as winners, and the winner’s circle may contain different players from those who stand there now,” the analyst for Technology Business Research concluded.

Tags: Business, HP, Dell, Lenovo, Apple

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