I bought my first personal computer 20 years ago, paying about $1,900 for what has turned into an antique. Last week, Best Buy had laptops with more than 1,000 times the processing power and storage capacity of my first PC available for $300. And that wasn't a special price for Black Friday. You can still get so-called hot deals online for a wide range of products.
But you probably knew this already. And this blog isn't about hot deals. It is about how an escalating pricing war between established OEMs and rising manufacturers is forcing companies to make significant changes to their operations, including their definition of acceptable margins, supplier expectations, manufacturing options, and marketing strategies.
Pricing is certainly undergoing a fundamental change in the electronics and IT industries. Amazon's Kindle clearly shows how the tablet PC market is being commoditized. Companies have to offer better pricing than rivals, especially in the savagely competitive consumer electronics market. Today's buyers have grown accustomed to seasonal price cuts on advanced products. They want bargain prices, not on yesterday's hot devices, but on the newer, faster, and better products with more functionalities.
More importantly for electronics makers and the extended supply chain, the pricing pressure is pitching established players against small, hungry rivals. That trend is not in the interests of the top companies favored by many investors. While analysts, shareholders, and reporters continue to fawn over the likes of Apple Inc. (Nasdaq: AAPL), the crowds you see at today's retail outlets have a wider range of products to choose from. And branding is no longer the most important factor in their selections.
Again, I'd like to share a recent experience at my local Best Buy. The store was packed last Saturday afternoon when I stopped by for a peek at the holiday offerings. Potential buyers were concentrated in the tablet, smartphone, and laptop section. A smaller but still sizable group was in the gaming section. I was dazzled by the range of products on display, but no single manufacturer could be said to be dominant. In fact, the Apple section at this particular store had fewer people than I had noticed in the past, and it wasn't too long before an employee explained why.
Yes, Apple's products are still flying off the shelves, as some have reported, but there's a dent in the story that is not being captured by recent headlines, which instead say Apple is still the company to beat in its market space. I don't doubt the positive conclusions about Apple's, but I believe a major change is taking place in its market.
Here's a sampling of the headlines:
These stories gloss over the reality on the ground. At the Best Buy, Apple's stand had fewer customers than the broader section that had products from Acer, Samsung, Motorola Mobility, HTC, and a bunch of relatively unknown manufacturers. There were tablets of various sizes on offer from less than $200 to $549, and many of them were considered viable alternatives to the more expensive iPad.
"People are asking why they should pay $200 to $300 more for products that perform the same functions," said a Best Buy employee.
Again, this blog is not about Apple's staying power and whether it is going to lose some of its market share. I believe that will invariably happen, since it's difficult for Apple to maintain its estimated 70 percent share in the tablet market. However, as rivals jostle for market share, they are also pushing the technology envelope and seeking pricing advantages in ways that will hurt everyone. In a previous blog, I pointed out that the companies that will be successful at snatching market share from Apple will have to be ready to accept lower margins for the same products. (See: Apple Can Be Beaten.)
This is already happening. It appears many OEMs have come to a similar conclusion and are driving down prices to gain market share. These companies are finding new ways to reduce total overhead, accepting lower margins, and expanding operations into new market segments to benefit from higher-volume shipments.
Here are the questions this development has raised in my mind as the process accelerates:
Who exactly is being forced to swallow an even bigger portion of the pricing concessions in the supply chain? Are OEMs pushing component vendors too hard? Is the already wafer-thin margin at contract manufacturers being whittled down even further? Are employees getting fewer raises and working harder, or is the reduced pricing simply a benefit of improved productivity from further technology adoption, such as the increased use of robots in the assembly process by Foxconn Electronics Inc. and other companies? How far we can push the pricing envelope before something snaps in the supply chain?
Finally, who will be standing when the carnage is over?