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Whatever happened to expensive PCs?

Gone are the days where contemplating the purchase of US$2,500 PC was a common occurrence. You’d have to go back to 1995 when the PC had zero competition from mobile computing and the idea of the “home computer” was a fairly new concept. Over the subsequent 18 years, Moore’s Law has been hard at work bringing down the cost of computing, boosting performance, and helping drive worldwide adoption rates. Nowadays, an excellent laptop for the everyday user can be had for less than US$500 and a solid tablet or smartphone can be bought for around US$200. As a result, a combined 1.5 billion computing devices — PCs, tablet, and smartphones — are expected to ship this year. This is where it gets interesting: Of the 1.5 billion devices, only about 21% are expected to be of the PC variety. The world of computing has certainly changed.

Source: NPD.

The key takeaway here is that lower-end PCs are becoming more capable with each passing year, meaning the everyday user no longer needs a high-end PC to suit their needs. Additionally, the explosive rise of mobile computing has likely put added pressure on PC prices in 2012. Before the rise of mobile computing, PC makers and Intel (NASDAQ: INTC) would benefit from lower average selling prices because it translated to increases in unit volumes. Unfortunately, this hasn’t been the case since 2011.

Sources: IDC and Gartner.

Playing catch-up
With worldwide tablet shipments expected to surpass portable PC shipments this year, and all PC shipments by 2015, PC makers have become pressed to deliver compelling computing solutions in the age of mobile computing. Naturally, Intel’s path to salvation is squarely grounded in mobile computing. Between Haswell, Bay Trail, and Merrifield, Intel has covered its computing bases from the high-end Ultrabook down to the smartphone. With this technologically advanced lineup, it’s hard to argue that Intel won’t have a compelling suite of next-generation mobile computing processors to compete against the ARM-based competition in the next year. However, investors should be reminded that technology alone doesn’t make an investment a guaranteed winner.

You see, the mobile computing industry has become even more commoditised than the PC industry. As a result, the average Qualcomm processor sells for around US$22 — far below the average selling price estimated for Intel, around US$107. Realistically, if Intel is serious about growing its smartphone and tablet market share, it’s going to have to match the competition on price.

That said, it’s going to take almost five mobile computing processors to compensate for the revenue of one PC processor, and there’s no guarantee current profitability can be sustained. Although ex-CEO Paul Otellini has told investors that its leading-edge capacity offers the lowest cost, highest performance, and lowest power on a per unit basis, he makes zero mention of gross profitability and the likelihood that average selling prices will decline. Ultimately, if you think Intel will automatically maintain its historically rich gross profit margins as it faces likely revenue pressure from the transition to mobile, you’re making an assumption.

Mr. Softy could use a lift
In many ways, Microsoft (NASDAQ: MSFT) rests its PC laurels on the fate of Intel’s success in mobile computing. So long as Intel can make inroads into the mobile computing world, Microsoft has a decent shot at making Windows 8’s backwards-compatibility a key selling point to potential users. With the prospect of US$200 Intel-powered Windows 8 tablets on the horizon, backwards-compatibility for a great price could potentially drive new revenue growth to Microsoft’s Windows division and help tip the scale back in favour of the PC. Consequently, a US$200 Windows 8 tablet doesn’t address the issue of falling PC prices and may actually cannibalise PC sales.

The way forward
Is it safe to say that PC average selling prices will continue to decline? Unless the sea of US$699+ Haswell-powered convertibles coming this holiday season captivates users, I think it’s pretty likely that the PC will face continued pricing pressure in the future. Lower-end computing devices continue to get better in terms of performance for the price, and everyday users may not see the value of paying up for higher-end devices.

In the end, I think it’s become clear that PC will continue its progression to become more tablet-like and it’s still a bit of a wild card how this will all play out for investors.

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A version of this article, written by Steve Heller, originally appeared on fool.com.

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