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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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NOVEMBER 12, 2002 SPECIAL REPORT: A PC REBOUND? Microsoft's Weaker PC Sales Punch The software king is still a computer-maker's best hope for stimulating new demand. It's just not as all-powerful as it once was MSFT ) launched the latest version of its Windows software for the newest breed of computer, the Tablet PC. Essentially an extremely versatile laptop, the tablet doubles as an electronic notepad. You can jot down ideas in the margin of an online news article or take minutes at a board meeting, then distribute your scribblings electronically. Microsoft spent $400 million developing the Tablet PC's operating system to incorporate sophisticated handwriting-recognition tools. Now, it's laying out $70 million to market the machine, which is sold by seven PC makers (see BW Online, 11/1/02, "Gates's Pen vs. the Keyboard"). Don't expect the new computer to attract droves of buyers, however. Market researcher Gartner Group predicts that at best only a few hundred thousand Tablet PCs will be sold next year -- as little as 1% of the total market for laptops. Even Microsoft Chairman Bill Gates, who has long championed the tablets, is expecting sales of only around 500,000 units. That says it all about Microsoft's suddenly muted ability to blast PC sales out of their current doldrums. For much of the 1990s, makers of personal computers were able to count on new products from the software king -- plus increasingly powerful processors from Intel -- to spur periodic boomlets: Seven years ago, after Microsoft released Windows 95, worldwide sales of PCs shot up 21%, from 59 million units in 1995 to 72 million in 1996 -- because it took a more powerful computer to run the hot new operating system. PERFECT ALIGNMENT. Microsoft is still a PC maker's best hope for stimulating demand. But nothing it has introduced lately -- or is likely to soon -- will replicate the golden era of the late 1990s. The Win95 phenomenon will go down in history as the exception, not the rule. Back then, the stars were aligned for Microsoft -- and the PC makers. The release of each new Intel chip -- the 486, Pentium, Pentium 2 -- made it possible to run the latest version of Microsoft Word, which came with bang-up features including spell-check and auto-correct. Then came the Internet: If you wanted to browse the Web at warp-speed, you had to head down and buy a new PC and a new version of Windows. Today's PCs sport vast processing power at rock-bottom prices. The latest models pack so much oomph that they've outstripped most software requirements, even Microsoft's notoriously bloated code. Moreover, the PC market has more than doubled since Win95 debuted, so it's harder, even for Microsoft, to make waves. INDIRECT EFFECTS. For example, in 2002, the first full year since Microsoft launched its latest-generation operating system, Windows XP, it has sold three times as many copies of it as it did of Win95 in the year following its much-acclaimed release, according to International Data Corp. (IDC) in Framingham, Mass. Those XP sales helped stem the worldwide decline in PC sales, which according to IDC dropped about 4.2% in 2001, to about 134 million units, but were unable to reverse the trend. IDC expects worldwide PC sales this year to come in flat to up 1%. At the moment, Microsoft is placing its biggest bets on products that will have only an indirect effect on total PC sales. Take the new Media Center PC, which Microsoft officially introduced on Oct. 29 at a price of $1,500 and up. Aimed at college students and other tech lovers who live in cramped spaces, the Media Center is a hybrid PC-TV that lets users check e-mail and watch DVDs. It also acts like a digital video recorder -- a la Tivo (TIVO ) or SonicBlue's (SBLU ) Replay TV -- in that it can search out and record TV programs (see BW, 10/21/02, "Replay TV's Latest Is Sure Worth Watching"). The idea is to transform the PC from a mere productivity tool to a souped-up entertainment appliance -- and thus attract a broad consumer base. But the Media Center won't move large numbers of PCs anytime soon: "It's going to appeal to a very small, niche audience," says Toni Duboise, an analyst at ARS Research in La Jolla, Calif. NEW WAYS TO INTERACT. Microsoft's Media Player is another product that Gates's gang is keen on. However, while the software giant has spent $500 million to develop it, Media Player isn't intended to drive PC sales directly. Instead, Microsoft sees the free, downloadable software as a way to encourage new ways for users to interact with their PCs, in this case to watch video and listen to music. The idea is that once consumers are hooked, they'll upgrade to new PCs so that they can create, edit, and share their own media files. "Our job is to point out new things to do with the PC, and we believe digital media is the next big thing," says Greg Sullivan, product manager for Windows XP. "If we keep developing new applications, PC demand will take care of itself." And if it doesn't? Microsoft still can play a role. For example, the wildly popular new Apple iPod MP3 player for Windows works only with Windows XP. With superfast desktop systems including XP priced at as little as $800, some analysts believe consumers will choose to pony up for the latest desktop rather than plunk down anywhere from $200 to $300 just to buy a new version of Windows. "I don't see software as a carrot. I see it as a stick. That's a totally different value proposition than the one we've seen to date," says Roger Kaye, PC analyst at IDC. A WIN-WIN. Clearly, while Microsoft may remain the one company that can do the most to stimulate PC demand, it alone can't bring back the PC business' glory days. Though the Tablet PC and Media Center have promise, few analysts expect them to take off until well after this holiday season. Moreover, the still-listless economy means that keeping prices low is a must if PC unit sales are to rise: Today's $800 Windows computer -- complete with a CD burner and a DVD-ROM drive -- might have cost brought 20% more only two years ago. The availability of such fast, cheap machines has given Microsoft the best of two worlds. It can still drive PC sales if it comes up with blockbuster software -- which in turn will lead to more sales of other Microsoft products. Yet it's no longer as dependent on strong PC sales to move its most advanced products. And that's just the way Bill Gates & Co. likes it.  By Jane Black in New York Get BusinessWeek directly on your desktop with our RSS feeds.  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