There is no question that the PC business is in deep trouble. According the latest figures from market watcher IDC, worldwide PC shipments dropped by 6.4% in the last quarter of 2012, down to 90 million.

The most obvious reason for this is the mobile revolution. Smartphones and tablets have captivated consumers’ imagination, and laptops and desktops are no longer objects of desire.

But that does not tell the whole story. For office workers, the PC is still an essential tool. If someone is working at a desk, then the chances are they are using a desktop or laptop.

The problem, then, is not that people are not using PCs – they are just not buying new ones.

To a degree, the PC manufacturers are the victims of their own success. “The hardware has also become so reliable that many PCs will likely be used until their components begin to fail,” explains Ovum analyst Roy Illsley.

Similarly, older versions of Microsoft’s Windows operating system are still serving companies well. “This is definitely the case with Windows XP, which Microsoft is going to support until 2014," Illsley reports.

In days gone by, businesses would need to upgrade their PCs regularly in order to make use of the latest desktop applications.

But according to Ranjit Atwal, research director at Gartner, there have been no compelling reasons to upgrade lately. “Software applications that require more effective PC performance haven't really materialised,” he says.

This is exacerbated by cloud computing and virtualisation. Applications that are hosted in the cloud or delivered from the data centre can grow in complexity and functionality without requiring extra processing power or an operating system upgrade on the end user’s device.

Put simply, the upgrade cycle to which the industry became accustomed has come to an end.

Drastic measures

The decline in PC sales is hitting some companies harder than others. It has been disastrous for Dell, a company whose name was once a byword for the sophisticated management of supply and demand.

Dell’s sales fell 5% to $58.7 billion in the 2012 calendar year – despite acquiring a considerable number of companies it acquired to stem its losses. According to IDC’s numbers, shipment of Dell PCs dropped 20% in the last quarter of 2012, leaving it with just a 10% share of the market.

Drastic action was clearly required, and so in February 2013, founded and CEO Michael Dell announced a leveraged buy-out bid to take the company private.

The bid is mainly funded by two private equity firms, plus a $2 billion loan from software giant Microsoft, a company that clearly has an interest in preserving the PC ecosystem. Michael Dell is reportedly chipping in $750 million of his own money to fund the deal, which was still subject to shareholder and regulatory approval at the time of printing.

According to Gartner’s Atwal, it may be time for Dell to give up on the PC business. “I think if Dell comes back as a PC vendor, they're probably in trouble," he says.

Instead, it must use the luxury of private ownership to drastically reposition its business. "To come back reinvented as an infrastructure vendor, Dell will have to change the culture of its organisation which it can't do while people's eyes are looking at it.”

Ovum’s Illsley has a slightly different view. He thinks Dell could still make money from selling PCs, as long it uses its recent acquisitions to offer more value to its enterprise clients – not something traditionally associated with the PC business.

Dell has already had some success with this, he says. In a recent deal to provide laptops to Swiss rail operator SBB, Dell included a mobile device management appliance to help deploy and manage the laptop estate. "That's the sort of value-add Dell needs to offer to win big contracts."

Dell is not the only manufacturer feeling the pinch, however. The decline in sales has intensified price competition in the PC market. But with Intel and Microsoft commanding a healthy slice of each sale, it is the manufacturer’s margins that have really suffered.

“Everyone in the PC industry used to be able to make some sort of profit,” explains Atwal. “But Intel and Microsoft have been taking the bulk of the margins, so as the industry has slowed down there has been a knock-on effect on the others in the supply chain.”

“The bottom line is that the PC model as it has existed, with low margins and high volumes, is really defunct."

Feeling the pinch

That is not to say that every company is suffering. In January 2013, Chinese PC maker Lenovo reported its most profitable quarter ever. For the final three months of 2012, Lenovo’s profit rose 34% year-on-year to $205 million, as sales grew 12% to $9.4 billion.

The company outshone most rivals in the PC business. Laptop shipments grew 9.5% year-on-year in the latest quarter, while desktops grew 5.8%. Lenovo was, by its own estimates, the fastest growing PC manufacturer for the 13th quarter in a row.

But unlike most of its competitors, Lenovo has also succeeded in branching out into new form factors such as tablets and smartphones.

"These days, innovation is primarily about bringing in new form factors," explains Marc Godin, Lenovo’s UK head. "We were, I believe, one of the most innovative, risk-taking PC vendors in the so-called ‘convertible’ market [combined laptops and tablets].”

Crucial to that transformation has been its domestic market – in the latest quarter, mobile sales in China rose 77% to $998 million. “We're very well known and respected in China, which is why we can drive success beyond PCs into tablets and phones there,” says Godin,

Also in January, Lenovo announced that it would be dividing its business into two units. One, which will retain the Lenovo brand, will sell ‘mainstream’ commercial devices. The second will focus on ‘premium’ devices for both consumers and businesses, and will carry the ‘Think’ brand it acquired along with IBM’s PC division in 2005.

In a memo to employees, Lenovo CEO Yang Yuanqing revealed that the move was designed to intensify competition with Apple. "In order to successfully challenge a new opponent to win new victories, we must have a clear and strong brand positioning," wrote Yuanqing. "Therefore, we need to give full play to the potential of these two brands in their respective market segments."

Lenovo’s decision to split in two arguably reflects the fact that there already are two markets for PCs. There is the commodity Wintel laptop and desktop market, which will always be fought on price and therefore most likely dominated by the Asian manufacturers.

Then there is the high-end market, typified by Apple, in which customers will pay high margin prices for high value products.

Can the likes of Dell and Hewlett-Packard compete with Apple in the high-end consumer business? Maybe, but it would be a risky bet.

But they can certainly pursue the high-end business PC market. Both companies have a raft of systems and services with which to offer added value to PC procurement contracts, whether they are cloud-based device management, remote storage, content management – the list is endless.

Still, much stands in their way, and it may be easier for new market entrants to seize this opportunity than for the established players to adapt.

For the moment, IBM’s decision to sell its PC unit still looks supremely canny.

“IBM realised a long time ago that the PC business was as much about margins as everything else, and that it was not going to be a sustainable business,” explains Gartner's Atwal. “Dell and HP have tried to copy them, but without getting rid of their PC business, as they assumed that it was core to what they wanted to do.”