Editor’s note: Disruption is evident in nearly every PC and mobile device product segment and price band as vendors prioritize profit per sale over restoring revenue growth or chasing market share. The race to claim greater profits is changing these traditionally static markets. A greater focus on premium devices — especially thin-and-light notebook PCs, gaming PCs and high-end smartphones — is resetting the dynamics within the market, says Technology Business Research.

HAMPTON, N.H. – When we look at overall PC and mobile device markets we observe these huge, very mature markets that on the surface have well-established customer buying behaviors, a well-defined roster of competitors, and a clear view into revenue and profit leaders and laggards.

However, as we zoom in on these global markets, disruption is evident in nearly every product segment and price band as vendors prioritize profit per sale over restoring revenue growth or chasing market share. The race to claim greater profits is changing these traditionally static markets. A greater focus on premium devices — especially thin-and-light notebook PCs, gaming PCs and high-end smartphones — is resetting the dynamics within the market. With these changes, however, the primary challenge for device vendors will be balancing the pursuit of higher margins from premium devices markets with protecting their installed base of mainstream devices that generate the bulk of profits.

It’s not surprising that larger vendors are generating the strongest momentum in the PC ecosystem, and that their scale allows them to leverage premium devices to mitigate declines in their core businesses. For example, profits and margins at Dell and HP Inc. are improving as premium PCs, especially notebooks, claim a larger share of their product mixes. In mobile device markets, premium devices provide Android OEMs with a road to operating profitability; Samsung’s Galaxy S7 smartphone helped it eke out operating profit in 3Q16 despite the chaos caused by fallout from exploding Galaxy Note 7 smartphones, and Huawei’s Mate 9 flagship handset helped post an operating profit for the first time.

These shifts in PC and mobile device markets validate the trend we have observed since early 2014 when vendors’ go-to-market strategies began shifting to favor premium devices. At first, changes in market dynamics compelled vendors such as Dell, Huawei and Samsung — and Apple, most notably — to hunt for profit as opposed to revenue. These vendors had no other choice; unit sales were slipping; profit pools were evaporating and the traditional business models were clearly out of sync with market dynamics. Now that most vendors have endured the growing pains of the shift to premium devices, their strategies hinge on excelling in segments adjacent to their core products.

In comparison, the more diverse PC markets are particularly effective at illustrating the changes in play in the global device market. In PC segments, we see the elevated roles of higher-margin services and peripherals, especially PC “as a Service” business models and 4K displays, respectively. Where premium notebook PCs were the initial focus for many PC vendors, now VR is moving the PC market in a new direction but toward the same goal: greater profits. PC purchasing models are also changing as vendors chase profit opportunities. The influence of “as a Service,” offerings particularly in commercial markets, will alter the path OEMs have traditionally taken into commercial markets. Adjacent areas such as peripherals, extended warranty and higher-function services — and the greater profits that come with them, often two to three times higher compared to PC hardware sales — are an extremely important component of most vendors’ long-term strategies.

Our research and financial modeling show some PC vendors are improving margins, sometimes by 100 to 200 basis points year-to-year. On paper this shows their success implementing and remaining committed to the expense discipline required when unit shipments were in free fall. But even the largest vendors are shedding profit dollars, sometimes 10%, 20% or more year-to-year, a sign fewer units shipped continue to impact vendors’ businesses. Larger vendors have mostly sworn off all-in efforts to reclaim global market share, electing instead to inflate profits by gaining share only in the most profitable segment. Lower profit volumes for these vendors are not yet a concern as larger vendors can lean on their scale and stronger balance sheets for protection.

However, should profit volumes continue to deteriorate, smaller PC vendors such as Acer and Asus may be forced to return to volume-centric sales strategies to slow profit decline. Other PC vendors, such as Fujitsu and Toshiba, will likely enter joint ventures with larger vendors to remain afloat. In this regard, these smaller vendors are more likely to exit the PC market. While their exit will create vacuums that remaining vendors seek to fill, the voids will be small, and provide only short-term respites from the persistent challenges to restoring profit growth.

About the author: Jack Narcotta is a senior analyst in TBR’s Internet of Things (IoT) and Devices Practice and leads TBR’s coverage of established PC and mobile device vendors such as Acer, Alphabet, Apple, Asus, Dell, HP Inc., Lenovo Group, Microsoft and Samsung as well as emerging vendors in augmented and virtual reality (VR), wearables and consumer IoT. He focuses on interpreting how shifts in competitive commercial PC ecosystems and the consumer devices market affect vendors’ business models and financial objectives.

(C) TBR