THE PC INDUSTRY IN 2020

The first personal computers (PCs) emerged from military research undertaken during World War II. For
three decades, vertically integrated firms, such as IBM and Digital Equipment dominated the market with
their mainframe computers. After smaller firms such as Apple and Commodore had begun to offer
integrated, pre-assembled PCs, IBM launched its first PC in 1981. When IBM's PC sales exploded, clones
such as Compaq and HP entered the market. All of these firms relied on resellers and retailers to reach
customers. Throughout the 1980s and 1990s, PC performance improved exponentially, and prices declined.
In the 1990s, the combination of Microsoft's Windows operating system and Intel's microprocessors was
established as an industry standard (referred to as Wintel). Global demand for PCs continued to grow
steadily throughout the 1990s and 2000s, with Dell taking over global market leadership, but decreasing PC
prices began to neutralize volume growth after 1997. The 2000s witnessed a series of industry changes,
notably the disengagement of traditional players such as IBM, the emergence of new entrants from Asia
(such as the Chinese Lenovo, and the Taiwanese Acer and Asus), the subsequent rise of Lenovo to global
market leadership, and the development of new product segments. Since 2010, the new tablet category has
grown spectacularly, which has led to declining demand for traditional PCs. However, tablets seem to have
reached a peak in recent years with stagnating or even declining demand. In 2019, portable PCs (notebooks,
laptops, and tablets) accounted for 78% and desktops for 22%. Compared to 2012, portable PCs gained
approximately 9% market share over desktops.

PC Manufacturers. Since the 2000s, PC producers experienced significant changes in their competitive
environment. A series of consolidation moves led traditional US players to sell their PC business to Asian
companies such as Lenovo (IBM in 2005) and Acer (Gateway in 2007). In 2011, Lenovo amplified this
trend towards global consolidation by acquiring the leading German PC manufacturer Medion, as well as by
forming a joint venture with the leading Japanese producer NEC. These consolidation moves contributed to
Lenovo’s rapid growth to a global market share of 17.6% in 2019. Lenovo has become one of the dominant
players in the global PC market alongside the traditional market leaders HP (14.3% market share in 2019)
and Dell (10.8%). Other Asian companies, such as Acer (5.7%) and Asus (5.5%), have also experienced
rapid growth, driven by consolidation and fast-growing consumer demand in their core Asian markets. i
Since 2010, the rapid development of the new tablet segment propelled Apple, a former niche player with its
iMac desktops and laptops, to an industry leader position (16.8% market share in 2019). The emergence of
the tablet segment has motivated a range of new players, including component suppliers (such as Microsoft),
mobile phone producers (such as Samsung), and media content provider (such as Amazon), to enter the PC
market.

Products. PC makers follow well-established standard processes to piece modular hardware and software
components together. The resulting PCs differ in their processing speed, memory capacit y, portability,
software configuration, and screen size. Hardware components, such as housings, keyboards, memory chips,
motherboards, disk drives, and monitors are purchased in highly competitive global markets served by
numerous suppliers.

In contrast, microprocessors are supplied by only a handful of companies. Intel dominates the traditional
PC processor market (desktops and laptops) with a market share of over 70% in 2020. Its only larger rival,
AMD, with a market share approaching the remaining 30%, uses a similar x86 processor architecture, which
has prevented the company from making inroads into Intel's near-monopoly beyond the low-priced
microprocessor segment. ii Intel makes its microprocessors available to everybody at a standard price,
thereby maintaining a level playing field among the different PC makers. When Intel releases a new
generation microprocessor, demand typically exceeds supply. Intel then rations its new product, allotting
microprocessors to PC makers in proportions that are roughly based on their past purchases. The price of a

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given microprocessor generation declines rapidly, as does the price of desktops and laptops using them. In
comparison, the majority of the tablets introduced since 2010 has relied on a processor architecture initially
developed by ARM. This company’s business model differs from those of Intel and AMD in that it designs
the basic processor architecture and then licenses it to other companies – such as NVIDIA and
QUALCOMM – that manufacture and distribute them. Consequently, tablet producers can obtain similar
ARM-based processors from a wide range of manufacturers located in different countries.

Over the years, it has become the standard to deliver PCs with the operating system and the most relevant
application software already installed, making them an integrated bundle of hardware and software. The core
piece of software on a PC is the operating system. In 2020, around 77% of all traditional PCs (desktops and
laptops) employed a Microsoft operating system, usually a version of Windows. iii A number of vendors offer
application software, such as word processors, spread sheets, database management systems, web browsers,
and electronic messaging software, where Microsoft also dominates the market. Tablets’ dominant operating
systems are Android (39.8% market share) and iOS (60%), while Microsoft has only 0.1% market share. iv
While iOS is Apple’s proprietary operating system, Android is an open source operating system that Google
provides to a wide range of producers such as Amazon, Lenovo, and Samsung. Tablet producers have also
developed a rich variety of applications, as well as content ecosystems, which offer tablet users easy access
to books, games, magazines, music, and movies.

In the 2010s, the dividing lines between PCs and other electronic devices have become increasingly blurred.
At the lower end of the processing and memory spectrum, smartphones have begun to compete with
tablets as devices for applications such as electronic mail and Internet access. In the gaming sector, powerful
gaming consoles have made inroads into the traditional PC market. At the higher end, PCs have become
increasingly difficult to distinguish from server-based network computers and workstations.

Customers. PC buyers can usually be divided into four broad categories: large companies and public
administration, small companies, individual consumers, and educational institutions. During the last decade,
large companies and public administration have accounted for about one-third of US annual unit sales,
individual consumers for another third, and the rest has been divided between small companies and
educational institutions. With regard to dollar value, large companies and public administration represent the
largest market share.

Midsize to large companies and public administration usually have significant IT departments that purchase,
maintain, and support PCs in a centralized fashion. The IT support staff members are highly knowledgeable
about their equipment. IT departments are charged with providing a reliable network of high-performance
computers, while also controlling information system costs. The capital cost of a machine is only a portion
of the total cost associated with the machine. Once purchased, IT staff has to tag a machine for
identification purposes, configure the software, install the machine at the user location, train the users, and
help users when they encounter problems. Corporations frequently spend as much as $5,000 annually on
supporting each PC. Most large organizations have a motley collection of PCs of various brands and
vintages. Small businesses usually lack IT staff. Reliability, performance, support, service, price, brand, and
channel recommendations all play a role in organizations’ choice of equipment.

Individual consumers purchase desktops and laptops for home-office or private use. When choosing a
brand, individuals rely strongly on the evaluations of independent organizations that provide consumer
reports. Individual buyers are a diverse lot but tend to be more sensitive to price and more interested in a
computer's brand name than business buyers are. Some consumers also pay attention to the microprocessor
brand. Intel has spent billions on advertisements of its microprocessors aimed at consumers. However, most
consumers perceive little difference between PC makers’ offerings, with the notable exception of Apple’s
products, which have maintained a price premium over other brands throughout the years.

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While demand for tablets initially arose from the individual consumer segment, tablets have started to play
an appreciable role in companies and educational institutions in recent years, with midsized and large
companies being among the biggest buyers. Apple initially dominated the tablet market with its iPad range
of products, but consumers seem to be increasingly open to other brands and models such as Samsung’s
Galaxy or Amazon’s Kindle Fire if only because, as market insight studies have found, tablet consumers are
even more price-sensitive than traditional PC buyers are.

Channels. The channels that PC producers use to distribute their products to companies, public
administration, educational institutions, and consumers evolved over time. While the traditional retail,
distributor/reseller, and direct sales channels remain active, they have been joined by a diverse set of new
actors, which include Internet retailers, mail order houses, and direct marketers. In recent years, many
specialized retailers, such as computer specialty stores, have had to close, while a few large generalist stores
such as Best Buy and Wal-Mart have expanded their dominant role in the distribution of PCs in the US and
elsewhere further.

Large distributors, such as Ingram Micro (2019 sales: $50 billion) and Tech Data ($37 billion), supply
250,000 resellers worldwide with a full range of computer hardware and software. These resellers, usually
small owner-managed firms, design, configure, install, and support computer networks for business
customers. On average, more than 90% of business customers accept reseller recommendations regarding
computer purchases. Beyond charging for their value-added services, distributors and resellers typically mark
hardware up by a few percentage points, although this mark-up (which the PC producers have to pay to the
distributors and resellers for their distribution services) has been fluctuating over the years. For example,
while the average mark-up in the 1990s had been 6% of revenues, it had dropped to an average of 4% in the
2000s. A few resellers are large enough to deal directly with PC producers rather than buying PCs through
distributors. Large integrated resellers, such as MicroAge and Inacom, run distribution centers, extensive
sales and service organizations, and, in some cases, manage their clients’ PC networks directly. PC
manufacturers usually agree to buy back channel inventory that has not sold. In addition, they provide
distributors and resellers with price protection: if the price of a computer falls while in the distribution
channel, the manufacturer reimburses the distributor or reseller accordingly. According to estimates,
inventory buy-backs and price protection cost PC manufacturers 2.5 cents of every dollar of revenue. PC
manufacturers spend another 2.5 cents of every dollar of revenue on advertising aimed at resellers and
distributors, on funding their market development activities, and managing product returns. PCs could take
up to five weeks to move from the PC maker through the distributors and resellers to the end customers.

Another traditional sales channel leads directly from the PC manufacturer to the end customer. Most PC
manufacturers take orders directly from customers, either by telephone, through their websites, and/or by
means of internal sales forces. Via third-party shippers, such as UPS and FedEx, they deliver PCs directly to
the end customer and provide additional services. A few PC players have started to open their own retail
stores. Most notably, Apple has opened a widely acclaimed chain of 510 stores that attra ct many customers. v

Manufacturing. Manufacturing a PC represents little more than assembling standard components. By the
early 1990s, a manufacturer could buy and install the equipment required for an efficient PC assembly line
and capable of assembling 250,000 PCs per year with an investment of roughly one million dollars. vi In the
late 1990s, PC vendors started outsourcing not only the assembly of PCs, but also their design to large
companies based in China and Taiwan, where labor costs were 80% to 90% lower than in the United
States. vii For instance, Apple outsourced its entire assembly line to the Taiwanese company Foxconn, which
currently has 250,000 employees fully dedicated to manufacturing Apple products. Overall, Foxconn has
over a million employees and assembles an estimated 40% of the world’s consumer electronics in several
Asian and Latin American countries. Furthermore, many components are inventions made by original
design manufacturers (ODMs), such as the Taiwanese company HTC, rather than being developed by the

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PC “producers” themselves. Some ODMs, such as Taiwan’s HTC and Acer, or South Korea's Samsung and
LG Electronics, have also started offering PC product lines bearing their own brand names in recent years.

The cost of many desktop and laptop components declined significantly throughout the 2000s, and the price
of a PC with a given level of functionality declined at a roughly similar rate. viii The decreasing prices as well
as the falling demand led to a growing overcapacity in the PC market and fierce, enduring pr ice competition.
Similar downward pressures in prices can now be observed in the tablet segment. Some tablet producers,
such as Amazon, Google, and Microsoft, have cut their price to levels that barely cover their costs. For
example, market observers have estimated that Amazon sold its first-generation Kindle Fire below cost and
has realized only a slim margin on the second generation. Furthermore, a few weeks after the Samsung
Galaxy’s official launch in 2010, white label producers (mostly smaller Asian firms without a known brand
name) started offering Chinese consumers tablets with similar specifications for just $60. ix Furthermore, the
value of a PC and its components, once manufactured and stored, declines rapidly. For example, the value
of PC components declines roughly 25% per year, and the price of a PC with a given level of functionality
tends to decline at roughly the same rate.

Research and development expenditures in the PC industry declined steadily, dropping from more than 10%
of industry sales in the 1990s to less than 5% in the 2000s. Interestingly, Apple managed to develop the iPad
while consistently spending lower shares of sales on R&D than its direct competitors. In contrast, Microsoft
and Intel took leading roles in hardware development. For instance, in the 2000s, Intel was devoting one-
third of its sizable R&D budget to projects that PC makers had traditionally undertaken, such as PC video
handling and internal data transport.x

Marketing and Promotions. PC manufacturers take a variety of approaches to marketing and promotion.
In 2015, Apple spent $1.8 billion on product advertising and brand-building activities and stopped disclosing
advertisement expenditure since then. In 2019, Microsoft spent $1.6 billion, while Lenovo and HP spent
$708 million and $652 million respectively. Other companies produce unbranded "white box" PCs and do
not advertise to the end user at all.

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Appendix
Global PCs Market Geography Segmentation

Region Share of Global PCs market

value
United States 27.1%
China 21.0%
Europe 15.6%
Japan 4.6%
Rest of the World 31.7%
Total 100.0%

Geography segmentation
Share of Global PC Market Value

27.1%
31.7%

4.6%
21.0%
15.6%

United States China Europe Japan Rest of the World

Source: MarketLine 2019

Endnotes

i International Data Corporation, “Top Companies, Worldwide Traditional PC Shipments, Market Share, and
Year-Over-Year Growth, 2019”, July 2020
ii CPU World.com, “Price chart of AMD and Intel desktop CPUs”, June 2020.

iii Gs.statcounter.com, “Desktop operating system market share worldwide”, July 2020.
iv Gs.statcounter.com, “Tablet operating system market share worldwide”, July 2020.

v Apple.com, “Apple Retail Stores”, July 2020.

vi D. B. Yoffie, "Apple Computer 1992", Harvard Business School Case 792-081.

vii D.B. Yoffie and Y. Wang (2002), Apple Computer 2002, Harvard Business School Case 702-496.

viii Merrill Lynch, PC Handbook, Feb. 2003.

ix The Financial Times, "PC Makers Turn to Low-Cost Tablets for Growth", June 2013.

x Wall Street Journal, "Computer Trouble: As More Buyers Suffer from Upgrade Fatigue, PC Sales Are

Falling", Aug.
24, 2001.