Thu, Oct 25, 2001 page24

• Analysts doubt XP will revive industry

  PRODUCT LAUNCH Earlier this year investors hoped the newest version of Windows would revive slumping PC sales, but expectations have been tempered following the Sept. 11 attacks on the US

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  Microsoft Corp's Windows XP operating system, which earlier this year was touted as the product that might save the PC industry from its worst slump in 15 years, is now more likely to arrive with a whisper instead of a shout, analysts say.

  "Do people plan over the next several years to buy Windows XP? Yes. But do they plan to buy it immediately? No," said Eric Upin, an analyst at Robertson Stephens, who rates Microsoft "market perform" and doesn't own shares. The product officially goes on sale in the US today.

  

  Microsoft Chairman and chief software architect Bill Gates delivers the keynote address to the Microsoft Professional Developers Conference on Tuesday in Los Angeles. During his speech, Gates discussed various aspects of the new Windows XP operating system, to be formally unveiled today in New York.

  PHOTO: AFP

  Windows XP is Microsoft's biggest overhaul of Windows for the home market since Windows 95 was released, when PC users lined up outside stores to buy it. Microsoft will spend US$200 million promoting XP and will unveil it at a New York event today featuring chairman Bill Gates, followed in the afternoon by a free rock concert by Sting. Still, analysts say it's unlikely XP will give the PC industry a boost this year.

  Earlier this year, investors expected Windows XP to spur a recovery in the PC market, on track for its first annual decline since 1985. PC sales dropped 12 percent to 30.6 million units worldwide in the third quarter, according to research firm Gartner Dataquest. Researcher IDC forecast a 1.9 percent drop in sales before the Sept. 11 terrorist attacks, which analyst Roger Kay said are likely to push sales down even further for the year.

  Windows XP is more stable than earlier home versions of the software, such as Windows 95, which failed to meet performance expectations, said Rob Enderle, an analyst with market-researcher Giga Information Group.

  That and other features that can turn the PC into a stereo, photo editor and video telephone, probably won't make XP a must-have product for consumers, he said.

  "We were dealing with a very positive market with Windows 95," Enderle said. "Folks had money and the PC market was relatively small." Adoption of XP will resemble the gradual increase in sales of Windows 98 more than the quick uptake of Windows 95, Upin said.

  Redmond, Washington-based Microsoft doesn't expect early sales to be big, company officials have said. Sales of Windows for PCs accounted for a third of Microsoft's US$6.13 billion in first-quarter sales.

  "We don't worry at all about the success of Windows XP," CFO John Connors said in an interview. "It will absolutely be a successful product over the long-term and it's really not a question of if, but when, PC demand will pick up." Upin expects Windows XP to bring in US$650 million to US$700 million of Microsoft's total sales of US$7.2 billion in the December quarter. Six months ago, he would have expected sales to be closer to US$1 billion, he said. For the fiscal year ended in June, Upin has forecast US$2.5 billion to US$3 billion in sales.

  Based on Upin's figures, XP would only account for 9 percent or 10 percent of US$28.59 billion in Microsoft sales Upin expects this year.

  The terrorist attacks and the US strikes against Afghanistan are expected to hurt the already lagging demand for PCs and software, including Windows XP, investors said.

  "Whatever your expectations were before Sept. 11, you have to downgrade them now," said Larry Jones, Chief Investment Officer at NCM Capital Management, who owns the shares.

  Microsoft earlier expected PC sales to increase at a percentage in the "mid-single digits" for its fiscal year ended in June. Now the company expects sales to remain the same as last year or decline.

  Demand for Windows XP is tied to consumers' willingness to buy new PCs because older machines won't run the program effectively.

  Windows XP will work well on PCs purchased beginning in the 1999 holiday season, Microsoft said. Some analysts interpret that to mean about half of existing PCs won't be able to run XP.

  Others, such as Upin, place the number at as many as 75 percent.

  Even so, Windows XP will appeal to customers, said Shawn Sanford, Microsoft's group product manager for Windows.

  "In the best of times and the worst of times people buy things that are important to them," Sanford said.

  But Microsoft's position depends on factors outside its control, such as the occurrence of more terrorist attacks, said Giga's Enderle.

  "Right now indications are the product will fail" to catch on, even over several quarters due mostly to poor economic conditions, he said.

  Enderle said his assessment is based on the assumption that there will be more attacks. If that doesn't happen, spending could recover more quickly, he said.

  Microsoft Group Vice President Jim Allchin, who runs the Windows group, has said that about 140 million PCs are least three years old, making them ripe for replacement. Analysts said many customers keep PCs longer than three years.

  Windows history:

  1981: IBM ships its first PC, loaded with Microsoft PC-DOS (Personal Computer-Disk Operating System). 1983: Microsoft debuts MS-DOS (Microsoft Disk Operating System), which supports hard drives. Microsoft also announces it will create an operating system based on dragging and clicking on computer screen icons. Microsoft dubs it "Windows." The technology was first seen by Bill Gates and Apple's Steve Jobs at a Xerox research facility. Both accuse the other of ripping off the technology. 1985: Microsoft ships the first version of the Windows software, 1.0. 1988: IBM and Microsoft break relations after the computer maker accuses Microsoft of creating a rival market. 1990: Microsoft unwraps Windows 3.0. Microsoft now sells a million copies of Windows a month. 1993: Microsoft publishes Windows NT 3.1, a corporate computing operating system that guards against crashes, a regular Windows problem. NT contains the core software for Windows XP. 1995: Windows 95 launched. New operating system includes "plug-and-play" capabilities that simplify adding peripherals, the ability to name files with regular words, and a start menu and task bar for easy access to applications. 1998: Windows 98 debuts. It includes Microsoft's Explorer Internet browsing software. 2000: Windows Millennium Edition: A slight upgrade from Window 98 that includes software to manipulate digital media. Today: Windows XP (for eXPerience), consolidates various Windows lines into new corporate and consumer versions, with simplified networking capabilities and close ties to Microsoft's online strategies.
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