Microsoft and PC Upgrades: Hasta La Vista

Microsoft and PC Upgrades: Hasta La Vista
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Updated: Without Vista to encourage PC sales, manufacturers and chip makers could be left hurting in the fourth quarter.Microsofts plan to delay Windows Vista will bushwhack fourth-quarter PC sales, industry observers say.

The software maker on March 21 said it would delay the release of Vista, an upgrade of its Windows operating system that promises PC users a better user interface and improvements in stability and security.

The company said it would deliver the operating system—which had been scheduled to arrive this fall—to most customers, including consumers, in January 2007, meaning Vista will be a no-show this holiday season.

PC makers had been counting on the release of the operating system to not only drive unit sales, but also inspire purchases of high-end machines with large allotments of memory, discrete graphics cards and relatively high price tags.

Without the operating system to drive interest among consumers, some of those fourth-quarter PC sales will evaporate, costing PC makers, chip makers and even Microsoft hundreds of millions in fourth-quarter profits. And its not clear if they will return come January, analysts said.

Read more here about why Microsoft delayed Windows Vista.

By delaying the operating system to January, as opposed to March or April, Microsoft is essentially daring consumers to blink when it comes to buying a new PC, said Steve Baker, an analyst at NPD Group, based in Port Washington, N.Y. Many of them will, he predicted.

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"I think that youre giving people an excuse not to do it—and not necessarily a bad one," Baker said. "Some of those lost purchases in the fourth quarter just dont ever come back."

People may also choose other products instead of PCs for their holiday purchases, shifting to items such as high-definition televisions, which are expected to drop down to the $1,000 mark for the first time this holiday season, Baker said.

Thus companies that rely heavily on consumer PC sales, including Gateway, Hewlett-Packard and Dell—although Dell executives are quick to point out that 85 percent of the companys sales are to corporations, the company admits sales to consumers rise substantially in the fourth quarter—are all likely to be affected in some ways.

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Roger Kay, president of Endpoint Technologies Associates, in Wayland, Mass., said the delay could cause to evaporate somewhere between 10 and 30 percent of the roughly 19 million computers he had estimated would ship in the fourth quarter.

A loss of 10 percent in the fourth quarter—or about 2 million units—would be fairly small in the grand scheme of things, considering Kay estimated that 220 million machines will ship worldwide in 2006.

But if the reduction were to get much higher, rising to something like 30 percent or about 6.5 million units, it could cause a noticeable drop in shipments. A dip of about 6.5 million units in the fourth quarter, inspired by the delay, would theoretically cut total PC shipments in 2006 by almost 3 percent, Kay said.

"Thats significant," he said, adding that the result could be a loss of several billion in revenue and, as a result, cut down profits by hundreds of millions for Microsoft, other PC makers and chip makers.

Other analysts held similar views.

"We view the delayed Jan 07 consumer release [of Vista] as a modest negative for Dell and HP," Chris Whitmore, a Deutsche Bank analyst, wrote in a report. "Our PC estimates remain unchanged, but we now have a negative bias towards 4Q06 PC unit shipments and higher bias to 1H07 units following the announcement."

Without Vista to help lure buyers, PC makers may end up fighting it out on price, he added, predicting an increase in price competitiveness in consumer PCs for the holidays. Increased price competitiveness generally translates into lower revenue for PC makers, lower profit or both.

Several PC makers said they will move ahead by ensuring that their machines are "Vista-capable."

That means they will design the machines to be able to upgrade to the operating system, when it is made available, and advertise them as such.

HP, for one, is continuing on with its plan to support Windows Vista across both its consumer and business product lines, a spokesperson with the companys Personal Systems Group said in an e-mail.

"Holiday is usually our strongest season, and we still expect it to be so," she wrote.

"With more than 90 percent of our consumer PC portfolio qualifying as Vista Capable, customers concerned with future compatibility with the new operating system will be able to purchase with confidence that their HP system will continue to serve them well as they look to move to Vista."

A Dell spokesperson declined to comment on how the delay could affect sales. "We look forward to Microsoft delivering Vista and well ship it as soon as its available," he said in an e-mail to eWEEK.

Next Page: How PC makers plan to cope.

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