Only Windows 8 can save the PC market now

Three days ago, near the end of his last Consumer Electronics Show keynote, Microsoft CEO Steve Ballmer boomed: "There's nothing more important at Microsoft than Windows". He better mean it, because the Windows PC is in big trouble. Fourth-quarter US personal computer sales were outright disastrous, while overall 2011 global growth was the worst since 2001. Recession that year devastated PC shipments, despite Windows XP's late-year launch.

There is no single reason for weak shipments during fourth quarter, when holiday sales typically give PCs a boost: Economic crisis in Europe, hard drive shortages following flooding in Thailand and weak demand among consumers, among others. There is a convergence of factors -- a cascading effect that disproportionately affects Windows PCs compared to Macs. On the Windows side, only Lenovo has proved immune. Apple meanwhile continues to sell Macs hand over fist, as they say, while Windows is at risk.

Worst Year Since 2001

On Tuesday, Tami Reller, chief financial officer for Windows and Windows Live, warned that the division's fourth-quarter results could fall below analysts' estimates (That's her above from the Microsoft CES keynote). She largely blamed the natural disaster in Thailand and estimated that PC shipments fell about 1 percent year over year.

Late yesterday afternoon, Gartner and IDC both released preliminary fourth quarter and full 2011 PC shipment data. Reller's statement indicated something unexpected, because of the stated reason. However, Gartner and IDC say the declines they observed -- 1.4 percent and 0.2 percent globally, respectively -- were in line with their forecasts. US declines were substantially greater, 5.9 percent by Gartner's reckoning and 6.71 percent by IDC's. The full year wasn't much better, with IDC calling 2011 the "second worst year in history" for US PC shipments.

The hard drive shortage is a mitigating factor that obviously cannot be ignored, but Microsoft is wrong to principally lay blame there. It's not like retailers sold out of PCs during the holidays because they couldn't get enough stock on the shelves. Shipments into the channel were down, but sales to businesses or consumers weren't necessarily up -- that is for most vendors. Gartner calls the hard drive shortage's fourth-quarter impact "limited". The full force is still ahead, and it comes during a quarter of lower sales anyway. IDC says that first quarter is when "the full impact of the HDD shortage is felt". Gartner is a bit more dismal, warning "first half" of 2012.

That, by the way, isn't necessarily bad for Microsoft and likely could have unforeseen benefits. The Redmond, Wash.-based company plans to release Windows 8 public beta in late February, which, based on past releases, likely will slow down current version license sales ahead of the new version's launch. Better there be a hard drive shortage now than in autumn, when, presumably, Windows 8 ships.

Top 5 Vendors, Worldwide PC Shipments, Fourth Quarter 2011 (Preliminary) (Units Shipments are in thousands) 

Source: IDC Worldwide Quarterly PC Tracker, January 11, 2012

Focus on Fundamentals

No one should let Microsoft, or even analysts, distract from fundamentals beyond short-term shortages of a key component. Simply put: Consumers aren't buying Windows PCs like they used to. Their spending goes to other stuff, with tablets -- and that really means iPad -- ripping away sales. We just finished the holiday quarter, one of the two seasons of typically strong sales (back to school is the other).

"Continuously low consumer PC demand resulted in weak holiday PC shipments", Mikako Kitagawa, Gartner principal analyst, says. Not hard drive shortages, but weak consumer demand. "While economic uncertainty in Western Europe had an effect on consumer PC shipments, expectations of a healthier economic outlook in North America could not stimulate consumer PC demand in that region. The healthy professional PC market as well as growth in emerging markets could not compensate for the weaknesses in mature markets, with overall growth still negative".

How negative? In the United States, fourth-quarter PC shipments fell for every vendor but Apple, according to Gartner. HP shipments plummeted by more than 26 percent, while Apple's grew by 20.7 percent. IDC put HP's decline at 25.3 percent and Apple's gain at 18 percent. The Mac maker solidified its No. 3 ranking, with market share rising to 11.6 percent from 9 percent year over year according to Gartner and to 10.92 percent from 8.63 percent by IDC's reckoning.

Top 5 Vendors, United States PC Shipments, Fourth Quarter 2011 (Preliminary) (Units Shipments are in thousands) 

Source: IDC Worldwide Quarterly PC Tracker, January 11, 2012

The Mac is big windfall benefactor of the PC shipment/sales crisis, because:

• Apple's brand is sizzling hot right now.
• Most people use Windows, which is old to them if upgrading, while the Mac is fresh.
• iPad cannibalize Windows PC sales, as businesses and consumers buy the tablet as upgrade companion or even replacement.
• Apple is more insulated from the hard drive shortage, in part because of how it sources components compared to most other computer makers.

"The industry still needs to work through some key hurdles in 2012, including recovery of HDD supply, the launch of Windows 8, and successful evolution of PC design to become still more mobile", Loren Loverde, IDC vice president, says. He's optimistic long-term. "Despite the challenges, the industry appears to be on the right path, and will be poised for substantial double-digit growth after working through these issues in 2012".

I've heard those predictions before, such as Gartner and IDC gangbuster forecasts for 2000 and 2001 or 2008 and 2009, before economic crisis crippled PC markets. Both analyst firms downgraded PC shipment projections throughout 2011, so don't bank on Loverde's enthusiasm. There remains lots of uncertainty and risk, as:

• Economic uncertainty (particularly in Europe) remains
• Major PC vendors place big bets on ultrabooks
• Media tablets suck away PC sales
• Windows 8 launches

Product Refreshes to the Rescue?

"In the United States, market saturation and the economic environment continue to weigh considerably on consumer demand. However, the market is awaiting new products and technologies, promising a new refresh cycle starting in 3Q12 and beyond with a return to positive growth in the mid-term", said David Daoud, IDC research director, says.

Preliminary Worldwide PC Vendor Unit Shipment Estimates for 4Q11 (Units)

Source: Gartner (January 2012)

Ultrabook and Windows 8 are the two technologies that will matter most, but the former is off to a shaky start. "Ultrabooks were quietly introduced into the market during the 4Q11 holiday season", Kitagawa osbserves. "Ultrabooks didn’t seem to draw consumers' attention. Consumers had very little understanding and awareness of ultrabooks, and only a small group of consumers was willing to pay the price premium for such models. However, as has been seen this week at the International Consumer Electronics Show...2012 is a big debut stage for ultrabooks".

Getting on stage is one thing. Finishing the performance, rather than being booed off, is another. Windows 8 will give ultrabooks their biggest appeal -- and a rash of forthcoming tablets, too. It's major reason Microsoft must get out Windows 8 public beta fast and build up interest among businesses and, more importantly consumers. Windows 8's Metro UI is fresh -- different from past versions and also Mac OS. New is good in markets like the United States, where most everyone likely to buy a Windows PC already has at least one.

Preliminary United States PC Vendor Unit Shipment Estimates for 4Q11 (Units)

Source: Gartner (January 2012)

Execution is the key, and Microsoft has challenges ahead -- starting with holiday quarter results. Apple is expected to report record Mac shipments (again) during a quarter when Windows stumbled. The Apple Fanclub of bloggers and journalists will go ape over the differences and gloat for months. Public releations-wise, Microsoft has at least a rough month ahead -- until Windows 8 beta releases and hopefully churns up buzz.

Meanwhile, major PC vendors must contend with their own cockeyed planning. The majority chose to announce ultrabooks after the holidays. Who's buying PCs now? Yesterday, I picked on Dell for announcing its sexy XPS 13 ultrabook at CES but not shipping until the end of February. Perhaps I was unfair or short-sighted. End of February, around the same time as Windows 8 public beta, is actually brilliant timing.