The concept of the Tech Bench, the in-store service arm for major retailers, appears to have reached a plateau in terms of its awareness, usage, and ability to influence in-store software purchases. While retailer service offerings have clearly expanded over the past couple of years, as have ones offered by hardware brands and independent 3rd parties, the focus of this expansion has been away from the computer and towards more lifestyle service opportunities, hardware training and CE services. Consumers are still highly aware of the tech bench, with 46 percent awareness and 13 percent usage, but those numbers have barely budged from 2008, when usage was 11 percent and awareness was 45 percent. Although this may appear negative, at least some of this plateauing is the result of the demise of Circuit City and its Firedog brand, which stood as the major retail competitor to Best Buy’s Geek Squad. This leveling-off of the computer service opportunity has likely led the in-store service industry to seek opportunities elsewhere, as we mentioned above. But, this shift away from the PC has come with consequences for the software market, especially the security product segment, as share of tech bench interactions that involved a software purchase or installation fell from 2009 levels.

Traditionally security software has used the retail channel as a way to encourage brand switching. By using the box on the shelf and aggressive initial pricing targeted at potential switchers, many brands have been successful at stealing market share from competitors through off-the-shelf selling. With the advent of the tech bench, retailers became more of the partner for brands looking to move consumers away from their current security provider and into a new one and began to control that process more, making it increasingly difficult to use the box and the price to steal competitors’ customers or get them to upgrade to a more comprehensive, and expensive solution.

As we mentioned in our press release brands like Trend Micro, Webroot, and Kaspersky have seen strong growth in awareness through this type of partnership focused on basic security needs, although they remain challenged in turning trials and awareness into long-term installed base gains. And while installed base can take time to shift it can’t be a good sign that even consumers who use or are aware of tech benches are rapidly moving towards suite level protection, something that is not likely facilitated by the aggressive trial offers currently available through tech benches at retail.

Overall the real takeaways from this report show a continuing shift in how software publishers and retailers interact, how the value of the retail storefront continues to evolve for the software market, and how in-store services deliver a mixed set of results to the software market. While confusion and uncertainty are never good, undoubtedly the turmoil at retail and in the economy over the last 18 months has caused at least some of this dislocation. Tech benches remain a key way for software publishers to create demand for their products, and retail remains the best place to implement programs designed to take share from rivals. However, it is likely that the value of these opportunities has begun to diminish over its peak just a couple of years ago and both retailers and publishers continue to search for the best way to deliver profitable sales growth that satisfies the needs of both sides.

Microsoft has a very different battle to fight in this release than in either the Office 2003 or 2007 version. Microsoft was very successful with sales of those products and its successful program to eliminate the “free” versions of Office floating around consumers’ homes and replace those with legitimate, upgradeable products that produced incremental revenue for Microsoft. Lifetime sales for Office 2007 at retail exceeded $1.5 billion for the 3.5 years it was on the shelf. A sales level that equated to approximately 10 million new copies of Office into the market in addition to the sales of PCs with Office pre-installed and the existing versions. Office 2007 was a radical new design that certainly helped deliver a lot of curious buyers and it was launched nearly parallel with Vista, adding a good deal of promotional activity in the software aisle, both of which likely helped drive initial sales of Office 2007. This time Office was launched during a seasonally slow period for PC purchases which have, over time, proven to be a have a strong impact on Office sales. The combination of these factors, plus the increasingly saturated installed base likely explains most of the initial weakness in sales of Office 2010.

With the release of 2010 Microsoft has to confront the success of its retail strategy head-on. Selling such a heavily used product into a base that has already been upgrading at a very high rate is an enormous challenge. While Office 2010 has many compelling new features, it is always an uphill battle to sell a high installed base product based on new features alone. Microsoft has been much quieter about selling Office 2010, choosing to release the boxed version at standard everyday pricing with a traditional mix of retail circular and end cap advertising, but without a lot of hoopla and fanfare (although some of this is likely to come during the upcoming back-to-school season). The key card product, designed to facilitate upgrading for PC buyers, has gotten off to a solid start accounting for about one-third of the unit volume. This is important because we do believe that the success of 2007 and 2003 at retail will make it very difficult for the boxed version of 2010 to generate much incremental retail sales volume above the trend line of the past 18 months or so.

However, the one strong opportunity for Microsoft and its retail partners is to add installations onto PCs where once the productivity software choice was Works or nothing. Last summer’s Next Class PCs from Best Buy that came with Office pre-installed were a first for retail and were very successful. The key card program can, as more PCs are shipped with the code enabling key card upgrades, potentially add some incremental revenue opportunities to the retailers that were not available to them previously.

Finally, a word needs to be said about the potential impact of free productivity products on the sales of Office 2010 to consumers. While products like Google Docs are certainly playing a part in the overall productivity software ecosystem, it is a virtual certainty that the slower than expected initial sales of Office 2010 have nothing to do with free alternatives, be they Google Docs or Office 2010’s own online version. These products have little awareness among the mainstream consumer who is the retail boxed version’s primary customer. Over time it is certainly likely that we will see some slowdown in retail sales as consumers alter their productivity software habits, but that time is not now. Mainstream consumers have not embraced the concept of the cloud, nor are they likely in the short to mid-term, making most of the questions around free software moot. The real short-term question is how Microsoft is able to match promotional fervor, pricing, and sales to the long-term opportunity to sell incremental versions of Office into a saturated consumer marketplace.

This is when Apple’s patience, or lack of attention, began to pay off. Last fall Apple finally recognized this emerging home server market and recast the Mini as a home server complete with Apple’s server OS and started the process to upgrade the Mini as well. And customers noticed too, as the sales in the Mini line began to revive as Apple started to remove the stigma of being the cheap computer in the otherwise high rent Apple line of products. Finally, last week Apple gave in to its customers completely. While not admitting it directly Apple fully abandoned the low price focus of the Mini, raising its price by $100, upgrading its case and finally adding an HDMI port. With the addition of this ubiquitous video connector it is apparent to all that Apple is finally embracing the positioning that its customers wanted for the Mini i.e. as a fully functioning HTPC (or home server) with the price and specs to match. Rarely does Apple give in to its customers and rarely does it acknowledge a mistake. But this time it did and the results for the Mini are likely to continue to improve because today, as it is more appropriately positioned, there is a much bigger, and emerging market for the PC under the TV. And Apple has finally admitted that in this case, its customers knew best.

To support these numbers we just released a survey of SMB buyers focused on companies under 1000 employees and found some optimism towards spending there, which is clearly borne out by the POS results. In the survey we dug a little bit deeper and tried to get at what SMBs intend to spend on in 2010 and whether this spending is above where they were in 2009. The results were extremely positive. More than 60 percent of those surveyed are intending to spend money in 2010 on PCs, networking equipment, and servers and 59 percent are planning to spend on storage equipment.

The main reason sited by companies for purchasing was to keep up with technology by upgrading their equipment. Almost 2/3 of purchase intentions were driven by the need to continue to upgrade their equipment. Certainly we have all been paying a lot of attention to the PC upgrade cycle in 2010 as the release of Windows 7 and the revived economy has helped spur interest in the upgrading clients.

Our survey found some interesting data in PC purchasing intentions. As we mentioned in the press release, PCs had the highest intention of being purchased in 2010 as well as the largest segment of companies planning to spend the same, or more, on PCs in 2010 as they did in 2009. Digging deeper we saw that PC upgrade intentions are very different by company size. Almost 80 percent of companies with more than 200 employees planned to spend on PCs as part of a long-term plan to upgrade equipment, a clear sign that Windows 7 is creating interest in larger firms. Conversely, only 65 percent of firms with less than 50 employees intended to upgrade for that reason. But 80 percent of firms of that size said they did intend to spend more, or the same, as last year. Among firms planning to spend less on PCs in 2010, 56 percent said they had replaced equipment last year and a whopping 75 percent of firms with under 50 employees said they replaced last year and would therefore be decreasing their spend this year. The bottom line then appears to be that sales will begin shifting to larger companies in the PC arena in 2010 as some portion of corporate budgets begin to be spent on new client systems.

In our 2010 online survey, we saw no change in the share of online software buyers who still wanted a disc even after they had digitally downloaded their chosen application. With the vast majority of online downloading coming from subscription renewals for products like security, there feels like an opportunity is being missed here. Two-thirds of all online software buyers are downloading what they bought (or renewed), but one-in-three online downloaders still want a disc. And with so many folks still looking for that physical product to hold it makes perfect sense that one of consumers biggest choices about where to shop online revolves around the availability of free shipping. Free shipping on bits and bytes!!!

With the upcoming release of Office 2010 offering many consumers an opportunity to download an upgrade to their current Office suite, the ability to buy a key card to unlock what sits virtually inside their PC, we may see a growth in awareness in the ease and accessibility that virtual software purchasing can offer consumers. As more and more applications offer cloud based options (as Office 2010 and Google Docs do) it is vitally important for retailers and publishers alike to message this ease of use and convenience to the mainstream consumer to keep them buying retail. Otherwise we could see the consumer lose interest in the benefits of ownership of software in the face of the no cost alternative, which would be a real tragedy when the alternative of virtual purchasing already exists.

I mention this in light of the launch a few weeks back of a software download store by Hewlett-Packard. As one of the leading consumer PC brands, HP’s Web site has lots of traffic. Buyers, tire kickers, comparison shoppers, and curious browsers all make up a stream of visitors to their site as the PC offerings draw a huge amount of traffic. In fact, according to NPD’s Consumer Tracking service the HP Web site was the second largest PC sales Web site in 2009 and accounted for 10 percent of all HP’s consumer PC sales in the U.S. With such a strong online presence it was natural that HP should begin to view its Web site more like a store and less like a PC buying and information site. And of course the fact that HP sells more than half of all the ink cartridges sold in the U.S. helps increase that number dramatically. Up until now HP had been very slow to bring in the accessories, peripherals, and software to monetize that traffic. Certainly HP has a long list of branded accessories like mice, keyboards, and webcams to sell; but to effectively capture all the potential value available increasing the selection to include non-HP branded products that logically attach to the PC, like software, and doing it outside the PC buying experience, through a download store, is a wise extension of the items listed for sale.

As the U.S. retail market for electronics has grown more concentrated it is vital for OEMs, especially ones who have the scale and traffic potential like PC OEMs, to leverage this traffic to create an adjacent retail experience for their direct shoppers. Of course this can be done on the Web, as Dell and now HP do, but also through brick and mortar like Microsoft, Sony, and Apple have done. We expect to see continued growth of these direct sales outlets as the leverage in carrying broader selections grows more compelling, and we expect them to be successful as long as they can maintain their focus on leveraging their traffic with adjacent products.

As my colleague Ross Rubin discussed earlier this week, the level of distribution for e-readers has undergone a significant upheaval in the past two weeks. The Kindle is being slowly rolled out at Target and the Nook will be available at Best Buy. This is changing the way we need to view their sales opportunity and why sales now matter most and shipment data is less relevant.

Go pick up your Sunday paper and check the circulars from this past weekend. Check out the front page of the Best Buy circular. There is the Nook in all its glory being introduced to Best Buy’s customers. So let’s do the math. Approximately 1000 stores, 50-100 per store (a best guess) comes out to 50k to 100k units B&N had to ship to Best Buy. And of course some ODM in Taiwan had to build them, and it takes time to do all that so it is a pretty good bet that those 50k or so units were built in March. That is a lot of e-readers to build in one month and that is why the Nook could out-ship the Kindle in March.

Now of course this is not to imply that the Nook can’t outsell the Kindle, or that the Kindle isn’t doomed, but merely to point out it is easy to ship a lot of anything, to fill all this wonderful new distribution, but that shipments are not the same measure of success as sales. Shipments are the fuel but sales are the engine. Long-term success is best measured, as it always has been, in units out the front door, not receipts through the back. Because sales matter most.

The store is set up with lots of table-type merchandising similar to the Apple store and to some other retailers’ concept stores that I have also visited. Clearly the future of in-store PC merchandising is to move it off the traditional retail fixtures and onto less cluttered shelving options. Among some of the cooler features was the ability to buy any piece of software and have it burned right in the store for you, while you waited, additionally you could also order a custom skin for your notebook and have it created directly in the store. Both felt like great personalization opportunities for the store personnel to sell. The clerk made sure to tell me about the Microsoft optimization on the PCs, which had the Microsoft suite of Live products pre-installed. Most of the store’s PC selection was notebooks, and most of the notebooks were standard product, priced competitively with the marketplace. There were sections dedicated for Zunes, for the Xbox, for software and other PC accessories, and for phones as well. But as good as the product merchandising was the store presentation was even better. It felt like a great place to shop with a good vibe.

After this visit I am more convinced than ever that Microsoft is on the right path with this retail strategy and as they roll out new products like Windows Phone 7 and more Microsoft-branded hardware having a high quality platform like these stores to showcase and sell it is a strategy that will benefit Microsoft and all its partners.

If the reviewers’ impressions match the early adopters’ usage and satisfaction then Apple, and the industry as a whole, have some serious thinking to do. More than a year ago we warned about the insidious impact netbooks would likely have on notebook pricing, and were correct. Windows non-netbook notebook pricing has fallen considerably since that time and Apple too has been forced to respond to this demand for lower-priced notebooks and has seen its ASP fall by $170 in the past 12 months. Now comes the iPad and soon, other tablets, all focused on the core slice of the typical computer users experience and needs at prices far below, especially for Apple, what I am used to paying for a notebook. NPD’s iPad study found that more than 80 percent of all potential iPad users were focused on Internet and email, and that 90 percent of all computer users do these activities as core functions.

Why do I need a $1200 Macbook when the $500 iPad (or less than that someday) can do almost everything I need to do? It is a question that has not been answered fully by the PC community, and one not addressed by the reviewers in today’s wrap-up of iPad functionality. Yet on a business sense it is a key one. Can the iPad sell enough units to make up for both the trading down phenomenon that we might see as well as the price reductions Apple could be forced to take to keep Macbook sales humming? No one yet knows the answer but the questions should be raised and the implications thought out. If anyone can prevent collateral damage through clever marketing and polished selling it is Apple but the risk remains real.

But none of this should surprise as these are the core Apple loyalists. Among these two groups, their current ownership of Apple products is nearly 50 percent higher than the overall population. 18-34 year olds are approximately 50 percent more likely to own an iPod, an iPhone, or a Macbook. Within the over $100k demographic there is almost 75 percent more likelihood to own an iPhone, or an iPod touch, and 50 percent more iPod ownership.

Combining the interest, awareness, intent to own, and purchase data give us a pretty solid idea of where the iPad might be headed. With these key demographics being the first buyers Apple will have a great opportunity to see how folks that they understand react to the product. This is really the first time in a very long time Apple has released a new product that is actually really new to the marketplace, and in fact few companies ever get a chance to do that. The iPod followed a few years of MP3 player development, and smartphones and internet access on them was certainly not unusual prior to the launch of the iPhone. What they are really doing is creating an army of beta testers (who are paying $500-$800 for the privilege) to help them understand the potential of this new device. While young people thought the product was too expensive, Apple owners and the $100k demographic felt OK with iPad pricing.

It is apparent both from our survey, and the launch event, that even if the potential buyers are pretty obvious, the potential usage and need is not. The launch event was about email and productivity. And while the survey tells us that most of the activity on computing devices surrounds those two activities and that most activity on mobile devices also follows those two paths, the bigger opportunities are around content and many of the likely buyers are looking for new ways to access content. Young people were far more likely to want to listen to music, watch video clips, watch movies, and display photos on the iPad than other age-based demographics.

All of this makes sense for Apple. In a segment with uncertain prospects target your best customers with a value proposition that is focused around what they currently do with similar devices. This lets Apple challenge those current devices (notebooks and netbooks especially) that consumers are currently using for these core activities without cannibalizing their current businesses (except the iPod touch and since the iPad sells for $100 more than the most expensive Touch, that is an OK trade for Apple). Then Apple can watch and see if that productivity story turns to media.