Have Consumer Electronics Become "Good Enough"?

Where's the buzz around the electronics industry lately? Smartphones no longer wow consumers, the PC refresh cycle gets longer every year, and even advancements in 3-D TV technology have been met with a yawn. Have we finally reached the point where electronics devices are "good enough" and people will stop paying extra for the latest and greatest? There's plenty of evidence this is already happening.

PC refresh cycle gets longer
Remember 10 to 15 years ago, when two years between new PCs was a long time? Today, going, three, four, or even five years before refreshing PCs is common, and it's having a huge effect on the industry. In 2012, PC sales fell 3.5% and are down 14% so far in 2013, hurting sales for giants such as Microsoft (NASDAQ: MSFT  ) and Intel (NASDAQ: INTC  ) .

Some of the decline sales is due to the preference for tablets, but a big driver is the fact that people simply don't need to pay for higher speeds anymore. Unless you're a hardcore user, you could probably get by running Microsoft Word and an Internet browser with a five-year-old computer today. Intel's latest and greatest chips are no longer a big draw for consumers, either, because there's not a very discernible difference in performance for the vast majority of users.

For example, I recently replaced a four-year-old Mac with a new Retina Display Mac complete with Flash memory, a top-of-the-line computer. It's better -- there's no doubt about that -- but it's not life-changing. A decade ago, a four-year-old computer would have been a dinosaur. Now it's just status quo, because computers are now just "good enough."

iPhone 4 selling well
The most recent devices becoming "good enough" are smartphones. Apple's (NASDAQ: AAPL  ) iPhone unit volumes were up 7% in the most recent quarter, but iPhone sales were up only 3%. The difference can be accounted for by the popularity of the iPhone 4 and iPhone 4S, not the newest iPhone 5. Consumers aren't seeing value in the newest iPhones, so they're perfectly content buying a one- or two-year-old model.  

The days of the free phone are back as well, something that was foreign when smartphones first arrived. Verizon Wireless is advertising the LG Spectrum 2, HTC 8X, and Droid Razr M for free on its homepage. Advertising free phones means people are more willing to accept what's "good enough" and not pay up for the newest, most feature-laden devices.

3-D flops
The latest technology phenomenon to fall on its face was 3-D TV, and it's just another example of consumers' satisfaction with what they have. When HDTVs came out, consumers (including me) paid thousands of dollars for the biggest, flattest TVs we could find and paid extra to get an HD feed. The same can't be said for 3-D TV, which was officially put on life support when ESPN dropped the format.

We could even extend the apathy for new TV technology to Blu-ray. Go to any electronics store, and you'll see a bigger DVD section than a Blu-ray section, even though it's been nearly a decade since Blu-ray was released. TV in 2-D HD or on DVDs is "good enough," and consumers aren't willing to pay extra for the next generation.

What it means for investors
When companies are wowing us with new products, it usually means high prices and high margins for product developers. When Apple released the iPhone and iPad, it could charge a premium, and the same was true for Intel and Microsoft when they were wowing us with better chips and operating systems a decade ago.

So if electronics have become more of a commodity, it will negatively affect margins at the electronics makers. There's plenty of evidence that this is already happening.

AAPL Gross Profit Margin Quarterly Chart

AAPL Gross Profit Margin Quarterly data by YCharts

Over the past three years, even as the economy was improving, Apple, Intel, and Microsoft have all seen a decline in gross margins.

Unless the consumer-electronics industry can wow customers again, I think the margin declines will continue slowly. Even low-end devices are functional for most users, and there's no need to pay up for the best, which isn't good for consumer-electronics stocks going forward.

Can Intel fight back?
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Read/Post Comments (12) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 18, 2013, at 10:36 PM, ralphrainwater wrote:

    The answer is yes, even the lowest end consumer electronics, laptops and desktops, are more than sufficient to do everything most people want to accomplish. At retail, if it's over $500, it's high end. When we started selling $299 laptops and a customer said to me, "So you've finally caught up with Wal-Mart," it couldn't have been clearer that the days of relying on computers to make profit for a business are over.

  • Report this Comment On June 20, 2013, at 5:24 PM, ChazCK wrote:

    I agree about computers, but not entirely about 3D TV. One (maybe the main) problem with 3D TVs is they came out just after many (including me) had bought big screen TVs because of a big push by TV manufacturers. I since have added a 3D TV, and my family enjoy it immensely. We would love to watch everything in that format, though broadcasters, such as ESPN, apparently have discounted 3D's value. It does seem, though, that there are plenty of movies being released in 3D, which means 3D Blu-ray dvds will continue to be available -- at least for a while. Long live 3D.

  • Report this Comment On June 20, 2013, at 6:20 PM, zontar100 wrote:

    Wait! Gasp...cough, I'm not dead yet! Look for the next wave of live high quality video running through everything. The big problem has been bandwidth to transport the signal. As that problem continues to improve, I think the flood gates will open.

  • Report this Comment On June 20, 2013, at 7:33 PM, Stagewalker wrote:

    I just attended InfoComm in Orlando where the electronics industry shows its latest and greatest to education, meeting, facility management and construction industry representatives. I did not see anything earthshaking, but what I did see was increased sophistication and better execution of existing concepts. Even the new Sony television with its gorgeous color rendition was an "oh by the way" for most of the people in attendance. Even the march of LED technology, while impressive merely extended existing trends. So, yes, lacking a major new concept, electronics will continue the trend toward becoming a commodity and less of a specialty.

    I agree with zontar that bandwidth will continue to cause drag on the system, but distributed server systems could easily solve much of that if the market truly existed.

  • Report this Comment On June 20, 2013, at 8:46 PM, wfinger111 wrote:

    Good enough is right. I purchased an Apple IPhone 4S last week to replace an old flip phone at half the price of the 5. The 4S was "good enough".

  • Report this Comment On June 20, 2013, at 10:52 PM, observerbob2013 wrote:

    The reality is twofold.

    Firstly the majority of people don't use the majority of the features on their computer or smartphone anyway. In the past they bought the new thing but then discovered that if they have any sort of a life they dont have time to mess around with the hundreds of features and basically just use it for calls or emails. So why pay more for a new model with even more unused features.

    Secondly we have become used to the cheap prices so an expensive new item has a much harder road than it used to have.

    Add to that the fact that everyone has less money to spend on non-necessary items today and you have a big problem for high end producers like Apple and a hugh opportunity for Samsung and Nokia

  • Report this Comment On June 20, 2013, at 11:19 PM, SuntanIronMan wrote:

    @observerbob2013

    This is just my opinion (no statistics handy to back this up), but I don't think there is so much of a problem for the high-end producers. I think there is more of a problem for the mid-range producers. That seems like a bad place to be.

    Take computers for example. There are consumers to sell to at a low-end price point and there are consumers to sell to at a high-end price point. But I definitely wouldn't want to be caught there in the middle. If a $300 computer is good enough, I'm probably not going to jump up a level to spend $500-700 on computer. And if I'm looking to spend more on a computer, I probably wouldn't be interesting in purchasing a computer that is just middle-of-the-road. At that point I might as well pay a little extra for something more high-end.

    That how I feel, at least.

    Smartphones can be a little bit different, depending on if you are in a country where subsidies are common and whatnot.

  • Report this Comment On June 21, 2013, at 12:42 AM, mikecart1 wrote:

    Since I am still using a laptop from 2006 and it runs just as fast as any 2013 laptop for what I use it for, consumer electronics have been 'good enough' for years. Most of my friends are the same way. Unless you are playing the latest and greatest games, you don't need a new computer. Unless you must have some extra mega pixels and a couple of extra features or 0.1" larger screen, you can just wait until your current mobile phone contract is up to get a free or discounted upgrade.

  • Report this Comment On June 21, 2013, at 8:53 AM, Jamesband wrote:

    Been saying it for years, how much further can we reduce technology created nearly a century ago. TV, Radio, the phone, this is not new technology, this is old technology made smaller and we’ve been doing it for 100 years, aggressively in the last 20. We think that our kids are so technology savvy because they can turn these gadgets on, this cannot be any further from thetruth. Most have become so self-indulged that they no longer know anything of any importance e.g. how anything works, infrastructure stuff, real science, and talk about being lost, most don’t even know what wars we are in, the numerous scandals in W.DC. or that the current government debt is 17 Trillion dollars. Certainly I could go on and on about how uninformed and uneducated they have become, a symptom of a government induced 12 year sentence (indoctrination) that is no longer intended to teach or prepare our young American students anything relative to life, liberty and the pursuit of happiness. We have become pathetic, weak minded, and lazy. What a shame, what a shame, so much opportunity, so much waste and abuse.

  • Report this Comment On June 21, 2013, at 9:20 AM, networkteacher wrote:

    I am contrarian on this. I love 3-D, retina displays, and a three monitor video display spread across my desktop. This is not about being up to date. I just purchased my first smartphone this year. Its about practical needs. Retina displays are easy on the eyes for long days at the screen. 3-D done right makes for an immersive experience. Its not the technology. Its hollywood that ruins that format. The multi-monitor display increases my productivity when I am authoring.

    On the other hand, I use but loathe tablets. The keyboard is way too difficult for my large male fingers to hit the right keys consistently.

    Having said all that, it is poor marketing to create great products and then price them in a way that forces them into an early death. No one wants that...not the consumer, not the inventor/developers, and certainly not the stockholder.

  • Report this Comment On June 21, 2013, at 9:45 AM, mclaugph wrote:

    Can you afford to replace your car every year?

    With families buying a couple of laptops, furnishing their homes with 2 or more TVs, purchasing smartphones for self & kids ( + the contract costs, with data plan), and then a tablet or two, how much money is there to replace this stuff every 18 months?

    They're still paying off the prior iteration, and it does what it needs to. Seems like an intersection of basic personal finance and common sense.

  • Report this Comment On June 21, 2013, at 2:14 PM, 48ozhalfgallons wrote:

    To Mikecart: I'm indeed with you! Amusingly, during those years since 2002 many of my friends upgraded twice or more, leaving themselves with "outdated" 2006 technology which they were only too happy to give away. Rather than upgrading, I paid off my house and cars and bought a huge, vastly discounted, 4th generation DLP. What a difference over the 12" CRT Sharp I was accustomed to. My two free 2002-2006 vintage computers can write this response as well as anyone using an 8 parallel processor Intel. BTW, I did purchase a Chromebook recently. Absolutely great keyboard and zippy internet. Goes anywhere. It seems like yesterday Apple was pushing $4000 22" monitors. I bought a 21" ViewSonic 16X12 for my 2004 Mac desktop for $99 because it was no longer adaptable to the newer Macs. I'll get a 3D TV when no glasses are required and no one is selling 2D.... kinda like when stereophonic sound replaced mono which occurred much faster than 2D to 3D.

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