Last year was a rough one for the PC sector -- hardly any companies saw growth, and shipment numbers were disheartening, to put it mildly.

In this video segment, analysts Dylan Lewis and Sean O'Reilly discuss what's keeping people from buying new computers -- and what's keeping companies from profiting, from tax issues to marketing decisions to global economics.

A full transcript follows the video.


This podcast was recorded on Jan. 15, 2016.

Dylan Lewis: Similar to some of the issues that are plaguing the smartphone market right now, PCs seem to be suffering from slower upgrade cycles. That's being a victim of your own success, in a lot of ways. Creating products that people want to continue to use that aren't breaking every four years, and are lasting longer. So, that's one of the struggles. Do you have a personal computer?

Sean O'Reilly: Actually, I use the work computer, and then my wife and I share a computer at home. And that thing ... I've replaced the hard drive. It's old. But it works. It's like, "I don't care, whatever."

Lewis: Exactly. I got a MacBook Air two summers ago. That's well within what the PC industry wants in terms of an upgrade cycle, year and a half or so. But before that, I think I had a Dell that I'd owned for five years.

O'Reilly: A little indicative of this, I literally just found this out the other day about Microsoft (NASDAQ:MSFT), and it blew my mind. This is kind of indicative, because Microsoft basically is PCs. In the year ended June 30, 2000, Microsoft's revenues were just under $23 billion. Guess what their net income was after paying taxes and everything.

Lewis: $4 billion?

O'Reilly: $9.4 billion net income.

Lewis: That's actually a pretty good margin.

O'Reilly: That is insane. Guess what it is today?

Lewis: On similar revenue?

O'Reilly: No. Their revenues for the 12 months ended Sept. 30, 2015, so the last 12 months, not year-end June 30 -- actually, let's just do the year. Is that fair?

Lewis: Yeah.

O'Reilly: Yeah, ended June 30, 2015, $94 billion in revenue. Growing just under fourfold on revenue. There's a one-year charge there, but guess what their net income was for that year.

Lewis: I'm going to stick with the same margin profile from before. That was $4 billion on $23 billion, roughly one-sixth, so one-sixth of 90-something, $15 billion?

O'Reilly: $22 billion.

Lewis: So, better than I thought, but that's a huge contraction.

O'Reilly: That is a huge margin contraction. Microsoft is having to work way harder to make money. And I did not know that until a couple days ago, and my jaw hit the floor, because I assumed Microsoft would be ... because their stock finally recovered in the last couple years to where it was in 2000, if you remember. Anyways, that's just indicative of what's happened to PCs in the last 15 years. Microsoft's having to work harder and harder and harder to make money.

Lewis: One of the interesting things that I read in IDC's coverage of the shipment data, they usually have some nice research notes to parse out the data and read between the lines a little bit, when after analysts talked a little bit about how Microsoft giving away Windows 10 as a free upgrade --

O'Reilly: Need you say more?

Lewis: -- also might have been a detriment to the PC upgrade cycle.

O'Reilly: Just think, in 2000, what were they getting per edition of Windows -- $200, $300?

Lewis: Yeah. So the thought with that analyst's note is that the new operating system refreshed the computer and gave people a sense of a new computer, even if it was the same hardware, so they weren't as willing to upgrade. So that's another reason explaining what's going on. Also, some people always fall back on the strong dollar hurting some of these tech companies, which is valid, but I always feel like that's a bit of a cop-out, because it's something that affects any multinational.

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