Consumers just aren't buying PCs like they used to.
Microsoft's (NASDAQ: MSFT) latest operating system, Windows 10, has received overwhelmingly positive reviews and has already been installed on over 110 million devices just three months after its debut. Still, PC shipments continue to tumble. Earlier this month, research firm Gartner reported that shipments of traditional PCs fell 7.7% in the third quarter, continuing an ongoing trend. For most of the last four years, PC shipments have been in decline.
In an effort to reignite demand, Microsoft has teamed up with its partners -- including Intel (NASDAQ:INTC), Hewlett-Packard, Dell, and Lenovo -- on an aggressive marketing campaign.
It does what?
The campaign consists of a series of TV spots highlighting newer features that owners of older machines may not be familiar with. Touch screens, folding hinges, better battery life, solid state drives, and facial recognition are all emphasized, among other offerings. One ad features a gymnastics coach using a folded laptop like a tablet; another shows a man stranded in the ocean typing away ("Up to 18 hour battery life" the ad declares).
There are more than 500 million PCs in use that are at least five years old, according to Intel. Although consumers may still find them adequate, they're ripe for replacement. If it works, this ad campaign could convince users of these machines to upgrade, triggering a massive refresh cycle and helping PC shipments stabilize, or even return to growth. Analysts are more skeptical -- Gartner believes the PC market will eventually rebound but not until 2017.
Mobile devices have taken a toll
These new machines indisputably provide a better computing experience, but many consumers may continue to resist the urge to upgrade. People simply don't place as much importance on their PCs as they once did.
Earlier this year, eMarketer estimated that adults in the UK would spend an average of nearly 2.5 hours with their mobile devices each day -- five times as much as they did in 2011. Crucially, they'd spend more time with their mobile devices than with their desktop or laptop computers.
In a survey conducted last year, CNet found that more of its readers regularly carry tablets than laptops and that smartphones were of the utmost importance. A full 83% of those surveyed said their handset was their single most important gadget. Other surveys have produced similar results. Pew Research found that a growing number of Americans are forgoing other computing devices altogether: A full 7% of Americans are fully smartphone dependent -- that is, their smartphone is almost the only way they access the Internet -- and 15% of Americans are mostly smartphone dependent.
If you spend most of your computing time with your smartphone or your tablet, and your PC is reserved for increasingly rare uses (if any), it's not clear that you'd be inclined to upgrade your PC anytime soon -- touch screen or not.
Winning without new hardware
Even if PCs sales remain stagnant, PC-related firms can continue to reward shareholders.
Microsoft is currently offering Windows 10 as a free download to owners of PCs running Windows 7 or Windows 8. In other words, many of those 500 million 5-year old plus PCs are capable of running it -- no upgrade required. It's clearly taking a toll on Microsoft's Windows revenue (despite Windows 10's impressive uptake, Windows OEM revenue slipped 6% last quarter) but benefiting its other business. Last quarter, for the first time, Microsoft's search engine Bing achieved profitability. Bing is deeply integrated into Windows 10 and is helping to drive increased usage. Subscriptions to Office 365, Microsoft's Office subscription service, also continue to surge, up three million last quarter.
Intel still depends on the chips used in traditional PCs for much of its business, but it is increasingly diversifying into other segments. Last quarter, its client computing group segment brought in just under 60% of its revenue. However, its data center group, which is centered on its server offerings, brought in almost 29% -- up from about 25% in the same quarter last year.
In the long-run, both companies could struggle if the PC platform continues to slide into irrelevancy. For now, they don't necessarily need consumers to upgrade -- though it'd certainly be a welcome development.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. The Motley Fool recommends Gartner and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.