This week officially marks the beginning of holiday shopping, with Black Friday kicking the year off (as always) with a bang. Between the discussion of employee walk-outs at Walmart (WMT), opening hours creeping further and further into turkey day, and J.C. Penney (JCP) looking to entice shoppers with the chance to win a slew of prizes, there has been no shortage of discussion about how retailers will navigate Thanksgiving weekend.
Amazon (AMZN) got the party kicked off early (along with other retailers) by offering deals in the days leading up to Thanksgiving; I’ve been on the site looking for some good deals, and have noticed something interesting: whenever any sort of computing device (whether it be a desktop, a laptop, a tablet, etc.) is featured, the product is 100% claimed in a matter of minutes. This is hardly shocking in itself – the opportunity to save 33% when buying even a mid-tier laptop can mean holding on to an extra $150 to $200. However, there’s something else in this action that’s worth discussing (this is where I start rubbing my crystal ball, so take this all with a grain of salt) – as computers have essentially reached the status of “good enough” for the average person (due to the combination of time and Moore’s law), there’s not much justification for dishing out hundreds of dollars more for a laptop with comparable functionality if all you’re planning on doing is surfing the web or playing Minesweeper every once in a while; over time, competition (namely in the form of Asian hardware OEMs) has done a good job of making sure that price points continually fall in order to make this point moot.
However, Microsoft’s (MSFT) Windows 8 might cause this to change for one reason: touch. For anybody who questions the future of touch in computers, I would suggest watching a recent investor presentation with Kirk Skaugen of Intel’s (INTC) PC Client Group; he makes a very compelling argument (backed up with solid consumer testing) suggesting that touch will be ubiquitous with computing in a short period of time (since smartphones and tablets are computing by another name, were already two-thirds of the way there). The problem for MSFT starts when we go back to the original premise: Computing has reached a point where the guts are good enough, and the purchase has become much more price sensitive (obviously not for everyone, but in general). Lower prices are directly in conflict with the industry’s plan (really Microsoft, with a steady dose of support from Intel) to make touch a seminal feature in computers; the result has been driving the prices of mid-tier devices higher (in the case of Dell’s Inspiron One 23 All-In-One Desktop, the price increase for a touch-enabled device is 20%).
At this point in time, this argument seems almost nonsensical; if you don’t want touch, simply don’t buy a PC with that functionality, saving yourself a decent amount of cash. Again, the problem comes back to Microsoft – in their attempt to focus on touch (as I’ve noted previously, it’s a strategy I agree with), Windows 8 has become an operating system with a decidedly different (worse) experience on devices without touch; as newer iterations come into the marketplace over time, my bet would be that Microsoft continues to leverage this feature and focus on it more intently to continue driving demand for their smartphones and “everything else” (tablets, convertibles, ultra books, etc.).
Over time, touch may become a ubiquitous feature for Windows PCs; my fear is that low-end devices will come from another software company focused on value-conscious consumers solely interested in bare-bones computing – and Google (GOOG) has already started along this path with the Chromebook, an offering that could look very different over time and eventually prove to be a competitor for Windows on desktop devices (a description that it loosely fits at this point, at least from my view). The reason why this is concerning is because Microsoft doesn’t care how much the PC costs – their goal is to sell as many copies of their operating system as possible, regardless of if the device costs $400 or $1500; over time, this could pressure the company’s commanding lead in the space, with consumers around the world – many of who are assumed to be more price-sensitive than their developed world counterparts – increasing their impact on the market (and likely benefiting the low cost alternative).
To be clear, this is all speculative and could easily play out much differently; this is simply what I’m thinking based on how I see these different companies approaching the market opportunity at this point in time (I think Chrome books and Bing are both overlooked as long-term threats to Microsoft and Bing, respectively). In the end, Microsoft may be more than happy to make this trade-off: give up some share in the PC segment while likely picking up millions of other users across the smartphone and “everything else” space due to the familiarity with the Win8 OS.
As I noted above, take this with a grain of salt; unlike the snacks industry, it’s anybody’s guess how this will play out over the next decade (I think you can safely bet that Frito-Lay (PEP) will still be dominating that market). If you can take anything useful away from this article, it’s this: As is generally the case, the fact that the future will be filled with unexpected change and breathtaking innovation as new products are developed is fantastic from a consumer point of view; as an investor, it just goes to show that one must tread carefully when jumping into bed with tech companies.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.