Will Windows 7 Reboot PC Sales?

For the first time in years, the PC market is starting to draw serious attention from Wall Street. Dell (DELL) shares surged after the company beat earnings expectations for the second quarter. The next day chip giant Intel (INTC) gave the sector another lift by raising its forecast for PC processor sales. Hopes are building among investors that the industry will see a revival in growth as Microsoft (MSFT) unveils its new operating system, Windows 7, on Oct. 22 to replace its troubled Windows Vista. "I think the uplift is going to be significant," says Brian Blair, an analyst with equity research firm Wedge Partners.

The question is how significant. Before Vista, a new Windows release could set off a corporate and consumer buying binge—not only for PCs, but also printers, mice, and software. Some analysts have pointed out that the Windows pop this time could be especially pronounced, since many people never bothered to buy Vista and some 600 million PCs are running the nine-year-old Windows XP.

But the tech bulls may be disappointed. Given the weak economy, PC unit sales are expected to rise 6.9% worldwide in the fourth quarter, according to research firm IDC. That would be the first quarter-over-quarter increase this year, but far short of the boost from releases such as Windows 95. "A lot of people are going to have to rethink their assumptions," says IDC analyst David Daoud. The firm expects PC sales to rise 6.1% in 2010.

Microsoft declined to comment for this story. But even the software giant has tried to tamp down expectations for the new operating system. "[The impact is] likely to be elongated over a couple of years, to be honest," Bill Koefoed, the company's investor relations chief, told shareholders in August.

That's not a reflection on Windows 7 itself. In preliminary testing the software has earned largely positive reviews, despite a few complications with installation. Besides delivering boot-up speeds and reliability that Vista didn't, Windows 7 will help PCs work better with high-speed networks, a key step as companies use more software programs online. Consumers will also be able to more easily view and share even high-definition content, whether it's a TV show on Hulu.com or a home video. "Windows 7 will put the pizzazz back into PCs," says Jen-Hsun Huang, CEO of graphics chipmaker Nvidia (NVDA).

The economy is the primary reason for the holdup in near-term PC sales. While some companies are boosting their capital spending, most will make do with their existing computers for now. Kris Kutchera, vice-president for information technology at Alaska Airlines (ALK), says she will wait as long as possible to upgrade, maybe until 2012. "There's not a huge value for us to move [to Windows 7]," she says.

NETBOOK NEMESISConsumers may be more inclined to embrace Windows 7, but they're likely to drive a hard bargain on price. Pinched customers have driven down the average price for a PC to $680, from $835, according to analyst Stephen Baker of researcher NPD Group. Many consumers are opting for small, inexpensive netbooks, a market Microsoft has helped fuel by offering a version of Windows XP for as little as $15. Microsoft hopes to charge much more for the netbook version of Windows 7, but that may prove difficult. "The whole market is moving to lower price points," says Harvard Business School professor David B. Yoffie. "Microsoft wants to go back to 1995, but the world has changed."

Any sales growth in the PC market will be a welcome change—not just for Microsoft but for the entire PC ecosystem. Chipmakers, for example, slashed capacity during the downturn and now are able to command higher prices because of tight inventories. "The operating system is great and it gets everyone excited," says NPD's Baker. "But the heady days of the PC business are long gone."

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