SOS: Microsoft to the Rescue?

The new Windows XP may help PC sales--but only briefly

In every corner of the gray personal-computer industry, executives are awaiting a ray of hope on Oct. 25. That's the day Microsoft Corp. (MSFT ) will launch its Windows XP operating system. With first-quarter consumer PC sales off 26% from a year ago, leaders from Hewlett-Packard Co.'s (HWP ) Carly Fiorina to Circuit City Stores Inc.'s (CC ) W. Alan McCollough are counting on XP for a boost. Says Gateway Inc. (GTW ) CEO Ted Waitt: "It could be the first new compelling reason to buy a PC that we've seen in a long time."

Or will it? While XP will certainly stimulate sales, it's unlikely to provide a miracle cure for slowing PC growth. What's more, the industry's current price war means that any XP-related uptick may do little to pump up the bottom line of battered PC makers and retailers. "We can't see the light at the end of the tunnel," says Elio Levy, senior vice-president at electronics distributor Tech Data Corp.

FINITE GAINS. Undoubtedly, XP offers consumers more than any operating-system debut since Windows 95. Based on the powerful NT operating system, XP should crash far less often than prior Microsoft programs for consumers. Moreover, users who share a computer will each be able to log on to their own startup page, complete with their favorite programs and Web sites, with a single mouse click. XP also makes it far easier to store tunes and print or share digital pictures. And in what could be one of its most striking features, XP's multimedia abilities will let users talk directly to each other via their PCs--or hold video conferences with a PC camera.

Trouble is, the days when a new version of Windows could drive a consumer buying binge may be over. And XP's advances don't make it the must-have that Windows 95 was. Back then, most PCs were clunkers that struggled to do even simple tasks. Win95 offered huge performance gains--and helped drive PC unit sales up 173% from 1996 to 1997, says industry tracker International Data Corp. But Windows 98 hiked sales just 20%.

Now, however, most people mainly use home computers to access the Net, which doesn't much care which Windows you use. And while PC users may not like frequent system crashes, that doesn't mean they'll fork over $800-plus for an XP machine. "There's not that killer reason to upgrade," says Gartner Dataquest analyst Charles Smulders.

Microsoft plans to do its all to convince consumers otherwise. It will spend $200 million in just four months to hype XP--twice what it spent in the same period on the extravagant Win95 launch. The software giant is coordinating an industrywide push as well. At a Mar. 22 Seattle powwow, Chairman William H. Gates III and Intel Corp. (INTC ) CEO Craig R. Barrett pushed execs from PC makers and retailers to do their part. Microsoft will hold a larger marketing event in late June.

GOOD DEALS. XP, along with other factors, should help give PC sales a good, if short-lived, bump in the fourth quarter and early 2002. The biggest reason may be the basic PC buying cycle. By October, consumers will be able to get much more powerful and faster PCs for the same price they paid several years ago. Credit Suisse First Boston Corp. analyst Kevin A. McCarthy expects fourth-quarter PC sales to rise 4% over the year earlier. And starting next year, McCarthy and other analysts expect companies that bought PCs before Y2K to start upgrading.

But that sales bump won't reignite PC makers' financial fire as long as the current price war continues. With Dell Computer Corp. (DELL ) leading a fierce charge for market share, that seems likely. So while the demand fueled by major Windows releases in the past allowed PC makers to raise prices, XP may not do much for earnings this time around. "Even if Microsoft creates some excitement, [PC makers] will just rush to grab market share," says J.P. Morgan Chase & Co. analyst Daniel R. Kunstler. The bottom line: If PC makers aren't careful, that hoped-for ray of sunshine may be fleeting.

By Peter Burrows in San Mateo, Calif., with Jay Greene in Seattle, Andrew Park in Dallas, and bureau reports

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