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PC Industry's Sales Hopes Are Pinned On XP

8/06/2001 02:00:00 AM Eastern

With the PC industry suffering through its worst ever sales drought, retailers and computer vendors are hoping Microsoft's upcoming Windows XP operating system will reinvigorate PC sales for the holiday selling season.

For this scenario to play out in a favorable fashion, Microsoft and the vendors must convince consumers that XP's features are so beneficial that it will be worth the expense to upgrade or buy a new PC. Industry insiders say this is a tall order considering the state of the economy, but all agreed there is a very good chance XP will deliver paying customers to stores.

"It is hard to imagine that there won't be a positive impact. I expect XP to put PC sales back on the plus side," said Steve Baker, an analyst with NPD Intelect, Reston, Va. Baker added that he sees some pent-up buying activity from the consumer sector because people have not had a good reason to buy a new PC for quite some time.

Van Baker, vice president of Gartner's Internet technology and society e-market intelligence group, said, "Windows XP is a huge improvement over Windows 9x. The improvement in stability alone should drive consumer purchases of XP. It will impact sales of PCs as it has higher platform requirements that will stimulate the upgrade/replacement market."

Windows XP requires a PC with at least 128MB of RAM to operate properly and takes up 1.5GB of hard drive space, although the remaining system requirements are well within the ability of any PC purchased in the past several years.

NPD's Baker said XP's new features, such as improved stability, networking, instant messaging and networking capabilities, offer consumers a compelling reason to buy a new PC. Sales of PCs in the United States dropped for the first time ever during the second quarter of the 2001, according to data from Gartner/ Dataquest and IDC, which is putting an unusual amount of pressure on XP to turn out interested customers.

"The PC business is really slow right now, but we really hope XP will give us a boost because people will have to upgrade their current PC or buy new," said Hal Compton, CEO of CompUSA.

If CompUSA is hopeful then the PC vendors could be described as desperate for XP to help boost their bottom line. Compaq and eMachines posted serious losses for the second quarter and Hewlett-Packard announced additional layoffs.

Compaq's CEO Michael Cappellas was not that optimistic. During the company's second quarter financial disclosure meeting last month he said the market, particularly the consumer side, is extremely volatile and difficult to predict. But Compaq does expect to show a profit for the third quarter after suffering a $279 million loss on $8.5 billion in sales last quarter.

Wayne Inouye, eMachines CEO, also put his best face forward after reporting his firm's loss, which took place on $115.9 million in sales in the quarter, ended June 30. During the same period last year eMachines lost just more than $62 million on sales of $124 million. The company third quarter forecast has eMachines continuing to cut its losses, but still posting a loss, then becoming slightly profitable by the fourth quarter.

HP CEO Carly Fiorina blamed weak worldwide economic conditions for the falloff expected for the company's third quarter, ended July 31, and said the company's consumer business will show a loss with sales expected to be down 24 percent. She said the layoffs are a direct response to these expectations, adding most will be implemented in the fourth quarter.

Dataquest's Baker was not certain the turnaround jump started by XP's release will be as quick as everyone plans. "The OEMs may place too much hope on it for the near term as the improvements in stability will largely be conveyed by a word of mouth marketing effort and that takes time."

To offset this, Microsoft will support XP with its biggest advertising campaign ever. An estimated $100 million will be spent. And helping garner mind share for Microsoft is the Xbox which will launch immediately after XP, said Steve Baker.

Another factor that could ruin the industries holiday season is a recent move by Senator Charles Schumer (D-N.Y.) to block XP's release. Schumer said he is considering seeking a court order blocking Microsoft from shipping XP saying the company should rework the OS so it is more compatible with other applications. Several state attorneys general offices are considering similar action. Their argument is XP, like previous versions of Windows, violates antitrust laws.

Such a move would be devastating to all involved said NPD's Baker. "It could be a disaster. I can't think of anything worse," he said regarding Schumer's move.

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