PC makers ready XP, but optimism fades

XP may not be the cure the PC industry is looking for as the price war continues and orders fall
Written by Ken Popovich, Contributor and  Peter Galli, Contributor

Computer manufacturers have begun taking orders for consumer PCs featuring Microsoft's newest operating system, Windows XP, and plan to get the first systems in customers' hands by 24 September, about one month before XP's official launch.

But while PC makers have been eagerly awaiting the chance to sell XP-based systems in hopes that the new software would reverse a yearlong decline in sales, some analysts contend that a weakening US economy, further undermined by last week's terrorist attacks in New York and Washington, has all but dashed those hopes.

In fact, one analyst said, the PC price war that has undermined companies' earnings may even get even fiercer in coming months.

On 14 September -- and without any public notice -- Dell Computer and Hewlett-Packard began taking orders for new consumer PCs with Windows XP preinstalled. Representatives of both companies said on Monday that the first consumers should be receiving systems on 24 September.

Representatives of Compaq, IBM and Gateway also confirmed that they plan to ship their first XP-based consumer PC systems next week.

However, most commercial PC customers face a longer wait, as computer manufacturers have agreed to restrict sales of XP-based commercial systems until Microsoft's official release date for XP, 25 October. Nevertheless, PC makers privately admitted that they will ship some XP-based commercial systems to select corporate customers in the coming weeks, reflecting a common practice of rewarding valued clients.

In recent months, computer manufacturers have been eagerly anticipating the release of XP, which they hope will ignite a new wave of PC buying following a year of declining sales.

But many analysts remain doubtful whether the software will help rekindle or even stabilise slumping PC demand.

"Our feeling is that XP isn't going to be a big deal," said Dan Niles, a market analyst with Lehman Brothers, noting that fears of a recession will spur companies and consumers to rein in their high-tech spending even further.

"You've got an environment where unemployment looks like it's increasing, the macro-economic picture is getting worse, and the stock market -- even before the terrorist attacks -- was not doing very well," said Niles, in San Francisco. "So then what is the desire for somebody to go out and spend $1,000 on a new PC? It's probably not very high."

Other analysts agreed.

"We did not have high expectations for an XP-related surge right away, but it was expected to boost the fourth quarter," said Andy Neff, a market analyst with Bear Stearns, in New York. But given the attacks, he said, "some of that fourth-quarter boost could be in doubt."

One industry research firm is predicting that while XP will sell well, it is likely to drain sales away from Microsoft's other OS products, rather than spur a new wave of computer buying.

"Windows XP will probably take away the momentum that Windows 98, Windows ME and Windows 2000 Professional currently have in the market," said Al Gillen, research manager for International Data Corporation. "We're not expecting XP to create some really big bump or bubble on top of Microsoft's current run rate; it's merely a shifting around of what skews are going out to which customers."

In a report released Monday, IDC predicted that in 2002, Windows XP sales would account for 67 percent of Microsoft's worldwide client operating environment new licence shipments.

To help foster sales, PC makers are packaging XP in relatively low-cost, but high-performance, configurations.

For example, HP is selling the XP-based Pavilion 7935 home PC, featuring a 1.3GHz Athlon processor, 128MB of synchronous dynamic RAM, a 40GB hard drive and a CD writer, for only $749.

Such low-cost systems reflect continuing price competition in the PC industry that has eroded profit margins and has further undermined earnings of major computer makers.

But while PC makers have been hoping that the price war would ease once computer sales rebounded, one analyst contends that cost competition will actually increase as the industry struggles to adjust to lower overall long-term demand.

"It has been our thesis that the developed world is growing increasingly saturated with PCs, causing PC shipment growth rates to decelerate permanently from 15 to 20 percent in recent years to 10 percent or less moving forward," said market analyst Richard Gardner, of Salomon Smith Barney, in New York. "In addition, we believe PC average selling prices are likely to continue declining 10 to 15 percent per year. ... [As a result] the pricing environment is likely to get even tougher in coming quarters."

See the Hardware News Section for full coverage.

See ZDNet UK's Enterprise Channel for full coverage.

Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet news forum.

Let the editors know what you think in the Mailroom. And read other letters.

Editorial standards