XP on the Way; Buyers Wary

Terrorist attacks combined with weak economy don't bode well for Microsoft operating system.

Computer makers this week will ship the first consumer PCs featuring Microsoft Corp.s newest operating system, but hopes that Windows XPs arrival would rekindle sagging PC demand apparently have been dashed by recent events.

The terrorist attacks in New York and Washington and the increasingly dour economic news have all but assured that PC demand will remain weak through the rest of the year.

Also, the price war that has undermined PC makers earnings this year may grow fiercer in coming months.

Representatives of Compaq Computer Corp., Dell Computer Corp., Hewlett-Packard Co., IBM and Gateway Inc. confirmed that theyll be taking orders and shipping consumer PCs preinstalled with Windows XP this week. But most corporate PC customers will need to wait until XPs official Oct. 25 release before they can receive delivery of XP-based enterprise systems. Microsoft officials last week reiterated their desire to hold the XP launch party in New York as scheduled, despite this months attacks.

In a potentially ominous sign for Microsoft, some system managers expressed no desire to upgrade to XP.

"Theres no hurry at all to go to Windows XP, and youre talking to a true-blue Microsoft shop who always has had the latest and greatest just as soon as its come out," said David Howell, IS manager at PED Manufacturing Ltd., in Oregon City, Ore.

Howell, who has tested XP since it was first released to developers, said it offers no significant benefits over Windows 2000.

"People are going to buy computers with XP preinstalled, and its going to get introduced into companies," he said. "But it works fine with 2000, so I doubt companies will migrate their other PCs to it. In fact, I think some companies will take it off and put on 2000."

Analysts are even more skeptical XP will help rekindle or stabilize slumping PC demand.

"Our feeling is that XP isnt going to be a big deal," said Dan Niles, an analyst with Lehman Brothers Inc., in San Francisco, noting that growing fears of a recession will spur companies and consumers to rein in spending. "Youve got an environment where unemployment looks like its increasing, the macroeconomic picture is getting worse, and the stock market—even before the terrorist attacks—was not doing very well.

"So then what is the desire for somebody to go out and spend $1,000 on a new PC? Its probably not very high."

To help foster sales, PC makers are packaging XP in relatively low-cost, but high-performance, configurations. For example, HP is offering 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 $749.

While PC makers hoped prices would stabilize late this year once sales rebounded, one analyst said cost competition will actually increase.

"The developed world is growing increasingly saturated with PCs, causing PC shipment growth rates to decelerate permanently," said analyst Richard Gardner, of Salomon Smith Barney Inc., in New York. "The pricing environment is likely to get even tougher in coming quarters."