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Intel Corporation (INTC), Microsoft Corporation (MSFT): Whatever Happened to Expensive PCs?

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Gone are the days where contemplating the purchase of $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 $500 and a solid tablet or smartphone can be bought for around $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 Corporation (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 Inc (NYSE:IT).

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 Corporation (NASDAQ:INTC)’s path to salvation is squarely grounded in mobile computing. Between Haswell, Bay Trail, and Merrifield, Intel Corporation (NASDAQ:INTC) 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 Holdings plc (ADR) (NASDAQ:ARMH)-based competition in the next year. However, investors should be reminded that technology alone doesn’t make an investment a guaranteed winner.

Intel Corporation (NASDAQ:INTC)

You see, the mobile computing industry has become even more commoditized than the PC industry. As a result, the average QUALCOMM, Inc. (NASDAQ:QCOM) processor sells for around $22 — far below the average selling price estimated for Intel Corporation (NASDAQ:INTC), around $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 Corporation (NASDAQ:INTC) 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.

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