It's a date: Windows XP to hit shelves in fall

An October release is likely to be viewed as a mixed blessing to the PC industry, which has been battered by a severe sales slump.

Many PC makers are hoping the upgraded operating system can spark a surge in sales as consumers and businesses upgrade their PCs. If Windows XP is released in October, they can expect a sales boost for the crucial holiday season but not for the back-to-school period, considered the second-busiest of the year.

Microsoft's delivery date for Windows XP has been a moving target in recent weeks, say sources close to computer manufacturers. A little more than two weeks ago, the software maker told some PC manufacturers that it would deliver final, or gold, code in June--in time for the late half of the back-to-school buying season. Gold masters are used to make copies of the operating system for new PCs.

One week ago, Microsoft revised the date, promising delivery of gold master copies by the first week of August. But, as first reported by CNET News.com, Microsoft also warned PC makers that if it missed that date, Windows XP's launch could be pushed back until next year.

As a result, it's possible that Microsoft--which has not publicly announced an expected release date--could again alter the timing for shipping the software.

Sources familiar with Microsoft's plans said in setting the Oct. 29 retail release date, the company also pushed back the delivery of gold code again--for the third time in about a month.

Xbox concerns
While firming up its commitment to deliver the code in 2001, "Microsoft is pushing back as far as they can go in getting Windows XP out the door," said Guernsey Research analyst Chris LeTocq.

The problem: Windows XP's launch risks running into the unveiling of Microsoft's Xbox gaming console, which is slated for fall release. According to sources, Microsoft told PC makers last week that it didn't want to launch both products at the same time.

"This is about as late as Microsoft can go without running Windows XP marketing into marketing for Xbox," LeTocq said. Still, "It's going to be interesting see if the Xbox marketing will hurt Windows XP. If you're a gamer, and you see Xbox coming but you had been thinking about going with XP, you're going to have a choice to make."

NPD Intelect analyst Stephen Baker agreed that Microsoft can't let marketing for Windows XP and Xbox overlap.

"There is some question that even a company as big as Microsoft has the resources to do two launches--Windows XP and Xbox--like that all at once," he said. "You're talking about a lot of money and significant things you're trying to get done at the same time--even though it's coming from different (product) groups."

A Microsoft spokeswoman declined to comment on Windows XP's availability other than to say it would be in the second half of the year.

Good news for PC makers?
The news could be good for PC makers strapped by slow sales, Baker said.

"The entire amount of money that Microsoft would spend to promote Windows XP would also serve to drive traffic into the stores, to resellers, to Dell's Web site, or wherever," he said. "That's all fresh money going into the (sales) channel that they wouldn't have without that promotion."

Microsoft has indicated that the launch for Windows XP could be as big as Windows 95, which would mean a significant investment in straight advertising or co-marketing programs with retailers and PC makers.

"For the computer industry looking at the doldrums we're seeing, the more promotion, the better it is for sales the last four months of the year," Baker said. "Microsoft is one of the few companies with that kind of cash to drive traffic. The market really, really needs that."

With PC sales down 3.5 percent year over year in the first quarter, according to Dataquest, or by IDC's estimation off by 9.5 percent, PC makers could use all the sales they can get.

While remaining cautious, market researcher Dataquest is forecasting 10 percent year-over-year worldwide PC sales growth for the year and flat sales to a slight gain for the United States. But Dataquest's predictions are based on the assumption that seasonal holiday sales will be normal this year, which they were not in 2000.

Baker believes Windows XP could make the difference for the fourth quarter.

But Gartner analyst Martin Reynolds doesn't believe Windows XP will do all that much for PC sales.

"The thing that is really going to define whether consumers come out this Christmas is how they feel about spending money," he said. "The challenge that the industry faces is, will the economy pick up enough?"

Piper Jaffray analyst Ashok Kumar also questioned whether Windows XP would be enough to turn around slow PC sales.

"There is no reason to expect a recovery, given the macroeconomic backdrop," he said. "This year, we probably will have to write off any recovery in the second half."

Sales already are so slow that Compaq Computer, Dell Compter and Hewlett-Packard are engaged in a brutal price war that knocked more than 30 percent off the price of some PCs this week.

Only Microsoft benefits
"The biggest beneficiary of XP is Microsoft," Reynolds said. "It's a strategic platform for them, for .Net and all the other services they want to bring to bear, as well as growing revenue through services."

Microsoft's .Net software-as-a-service strategy will be part of Windows XP as the company looks for other ways to sell software, such as on a subscription basis.

"In the long run, the sooner Microsoft gets everybody to Windows XP, the better off they'll be," Reynolds said.

Microsoft, which starts its 2002 fiscal year July 1, needs all the help it can get in meeting sales growth and earnings per share estimates, Merrill Lynch analyst Henry Blodget wrote in a research note Friday.

"The need for acceleration in core revenue growth suggests that factors often cited as sources of upside to estimates--Office & Windows XP launch, Y2K refresh--are needed for Microsoft to merely reach its (fiscal year 2002) EPS (earnings per share) target."

The company's earnings guidance is $1.90 to $1.94 per share, "which implies core revenue growth of about 14 to 15 percent, assuming flat operating margins and nonoperating income," Blodget wrote.