Where have all the PC sales gone?

It's the question to ask now that Intel has issued a third-quarter profit warning. Right, this is the same company that reported its "best quarter ever" just last month. Strong PC sales mean more chip sales for Intel, and second quarter was scrumptious-delicious. PC shipments rose 21 percent year over year, according to Gartner, beating estimates. Apple and Microsoft had record quarters, too. Everybody swayed in the mosh pit of love, singing praises to a PC market recovered from recession.

Today, Intel sang a different tune, cutting its revenue estimate to $11 billion from a previously forecast range of $11.2 billion to 12 billion. "Revenue is being affected by weaker than expected demand for consumer PCs in mature markets," according to the press release. Yeah, Happy Friday to you, too, Bud.

As if there isn't already enough bad economic news. The last week has been full of it. This morning, the US Bureau of Economic Analysis revealed that second-quarter GDP was a tepid 1.6 percent rather than the previous 2.4 percent estimate. Days ago, two different housing reports -- from National Association of Realtors and US Commerce Dept. -- revealed record housing sales declines. NAR put housing sales down more than 25 percent in July year over year. Commerce Dept. reported new home sales declined more than 32 percent in the same time period.

All signs point to double-dip recession in the making and slowing consumer spending, which drives between 60 percent and 70 percent of the US economy. These sully indicators have sent stock markets swinging high and low, like the amusement park ride from Hell. It's puke or pee time, baby.

Still, grim news doesn't mean the grim reaper is coming. Yet. Intel's profit warning doesn't have to mean doom for Apple, Dell, HP, Microsoft or many other companies adjoined to PCs. Much depends on the reasons for Intel's problems. Second quarter tends to be slowest for PC sales, which makes Intel's record results somewhat surprising. By comparison, Q3 is one of the two best quarters for PCs sales because of back-to-school buying. These PC sales are more typically consumer driven, although there still is much institutional buying, too.

I have to ask: What? Are Freshman going to college without new laptops this year? Are the European and US economies really so bad that moms and pops can't pony up for a shiny, new back-to-school PC? If that hard-to-believe scenario is true, it can't be good for Microsoft attaching Office to new computer sales.

So, why then is Intel reporting slowing sales during a quarter that should otherwise be strong? It's easy to blame the economy, eroding consumer sentiment and spending, high unemployment  and shrinking school budgets (Hey, tax base is lower because of unemployment and other economic maladies). But there are other factors that shouldn't be ignored (but probably will be in many simplified analyses). Three factors stand out, and two derive from economic conditions:

1. Rising PC inventories. There is a revealing "tell" in Intel's press release: "Inventories across the supply chain appear to be in-line with the company's revised expectations." The key word is "revised." Gartner, like rival IDC, measures PC shipments going into the channel, not sales out to customers. Strong Q2 shipments would be good for Intel chip sales but are no guarantee they would continue to be strong. If retailers and dealers don't sell enough PCs in stock, OEMs like Dell and HP won't ship as many more, meaning they also won't place as many chip and other component orders from Intel.

Should rising PC inventories be a factor, it foreshadows trouble for other component manufacturers and software developers that ship software on new PCs. For example, Microsoft could see a slowdown in Windows 7 OEM license sales and for Office 2010, which consumer sales already were slower than anticipated.

2. iPad sales. Every tablet that Apple ships is a computer without an Intel microprocessor. It's Apple A4, baby. Apple shipped more than 3.2 million iPads during Q2. I've seen Wall Street analyst estimates ranging from about 4 million to 6 million units for third quarter. Apple's tablet is the cheapest Mac anyone can buy and it's familiar to the iPod touch generation of incoming college Freshman or 11th and 12th grade high schoolers. Then there are the people who choose iPad as an adjunct to an aging PC, rather than buying a new computer.

By the gross numbers, iPad shipments pale before PCs. Globally, vendors shipped 82.7 million PCs during Q2, according to Gartner. However it's not how many but to whom that matters. Right now, Apple is selling iPad mostly in mature markets, which Intel explicitly identified as being slower for PCs than anticipated. Could it be that iPad is cannibalizing PC sales? There has been much debate about iPad impact on computer sales, with some Wall Street analysts indicating such a scenario is unfolding. In that circumstance, Intel is more casualty than, say, Dell or HP. Because every iPad sale is a computing device without an Intel processor -- and coming from Apple, which otherwise buys Intel chips for Macs.

3. Smartphone sales. I'm surprised no one is really asking whether or not smartphones are cannibalizing PC sales. For smartphones, Gartner does measure sales to end users rather than shipments into the channel. During Q2, smartphones accounted for 19 percent of worldwide handset sales, rising 50.5 percent year over year to 61.6 million units. Consumers have many more smartphones to choose from in 2010, and prices are declining, particularly as more Android models come to market.

How many Millennials do you know that eat, drink and sleep with their cell phones? Surely a smartphone wouldn't replace a PC, but a new model costing less than a laptop could be the choice in an either-or purchase decision; the student makes do with an older computer or shares with a roomie. Meanwhile, adult consumers looking for a connected computing device could easily put off new PC purchases for a smartphone as companion to the aging computing clunker. The scenario would more likely hurt Intel than PC manufacturers, since most smartphones ship with chips from competitors and some OEMs now sell handsets.

Bottom line: Intel's profit warning is disturbing and foreshadowing but not necessarily disastrous for the entire PC sector -- nor the larger US economy. That said, no one should dismiss as frivolous Intel warning just as schools resume across the country. Will the PC sector get a failing grade for the quarter? I sure hope not.