Margin of error

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9 May 2013 | 0

Ingram Micro’s most recent results offer an interesting glimpse at what a post-PC tablet and mobile device market could look like for hardware distributors. On the face of it, it’s not a pretty sight. For the first quarter ending 31 March, sales were up 19% to $10.26 billion (€7.8 billion) but margins were down, declining from 2.05% to 1.55% in North America, from 0.85% to 0.64% Europe, from 1.82% to 1.25% in Latin America while remaining relatively unchanged in Asia-Pacific.

While margins were down, sales increased in all regions, rising 7% in North America, 12% in Asia-Pacific and 7% in Latin America. Sadly, Europe could only muster a measly 0.8%. Ingram Micro made no bones of the fact that gross margins had been affected by "a greater mix of lower margin products, such as tablets and other personal devices", as well as a competitive environment, particularly in Europe and North America.

So it looks like a world where people in the PC hardware game will have to sell more to stand still-if they’re lucky. Or Bill Gates.

The former CEO of Microsoft was in the news this week explaining in an interview with CNBC that a lot of people who have bought iPads and Android tablets are frustrated because they "can’t type, they can’t create documents, they don’t have Office there".

 

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Thankfully, Microsoft is riding to their rescue with its own Surface and Surface Pro tablets and also making Windows 8 (along with Office) available on tablets from the usual suspects in the PC market.

Gates claimed Windows 8 was revolutionary because it took the benefits of a tablet and a PC and supported both of them. We can assume one of those benefits is Office which Microsoft (surprise, surprise) is in no hurry to make available as a full product for the iPad or Android-based tablets.

Anyway, to return to the subject of margins, you may not have noticed that in its most recent results (for the third quarter ending 31 March), Microsoft’s overall gross margin was more than 76% and the profit margin for the Windows Division clocked in at a smidgeon over 60%.

While there is bound to be some margin decline going forward because of Microsoft’s involvement in the tablet hardware business, I can’t help wondering if a company that markets its OS as the same whether it’s on a desktop or a tablet, is going to be charging OEMs less for a copy of the OS dependent on the device. I could be wrong, but it doesn’t sound likely to me otherwise people would be paying a lot less for the same OS dependent on their device.

So assuming Microsoft keeps its 60% profit margin on tablets and PCs, it’s possible the Windows ‘tax’ could rise as an overall percentage of the product cost for tablets and other mobile devices. Which means those poor old hardware distributors and vendors are going to be working a lot harder on their lower margin tablet products to try and keep anything like their existing fairly minor margin share going forward.

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