October 30, 2000

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Fret Not Over PCs Or Microsoft

Despite the scare stories, PC sales in general--and Microsoft's sales in particular--continue to do just fine

By Stuart J. Johnston

bviously, somebody didn't read my March 20 column about watching out for bum stories ("A Little Perspective Is Worth 30 IQ Points"). Shame on them. In the past month, a handful of companies reported revenue and income numbers that were a little lower than financial analysts expected. A couple of others gave earnings warnings, saying the summer quarter was slow. However, that's a long-established pattern--the summer quarter is traditionally the slowest of the year for most technology companies.

But when a couple of the larger PC vendors said sales in Europe were slower than they expected, the markets went into a dive. The usual rash of bum stories started. "Is the PC dying? Are markets saturated? Will new devices edge the PC into the grave?" Seemingly, no one noticed that other companies are doing just fine. Included on that list is Microsoft, which beat analysts' expectations, as usual. Still, the tech-sector stocks continue to take the beating they've been absorbing since March.

I submit that much of this roller-coaster effect is merely fear, uncertainty, and doubt. Of course, for Microsoft, the antitrust case is once again in flux and won't be resolved until next year at the earliest. Also, this presidential race is the closest in 40 years.

But why are we seeing stories warning that technology sales in the Christmas quarter may not be good? After all, consumer confidence remains high--and Christmas has traditionally been good for consumer sales.

According to the leading technology analysis firms that I trust, PC sales growth in the third quarter was 18%. Sure, that's down from 23% to 26% in the year-earlier period, but it's in line with the historical sales growth of more than two decades. And last year at this time, everyone was building bomb shelters and stockpiling food to prepare for the Y2K bug. Remember? Welcome to the New Frontier.

There are more than 300 million PCs in use today, and this calendar year will see another 130 million shipped. Even with a "mere" 18% growth in sales, that means there will be a lot more PCs shipped this year than last. There has never been a year in which PC sales weren't higher, year over year, since the PC was introduced back in the mid-1970s. It's also much harder to grow from 300 million to 430 million than it was to grow from 10 million to 13 million. Still, sales growth in the Christmas quarter is expected to be about 20%.

Yes, a myriad of new client devices are coming that could overthrow the PC. But despite rosy predictions, we have no proof of that yet, and I've got serious doubts. Several analysts have predicted that more than 1 billion Internet phones will be in use in a couple of years. But with only 6 billion people on the planet, you've got to wonder if those analysts have watched too many reruns of The X-Files. And while I don't doubt that some folks will buy Internet appliances as an alternate access device around the house, that market is still nascent.

So what about Microsoft? Despite strong earnings growth, some financial analysts are worried that Windows 2000 won't be a blockbuster. Worse yet, sales of Office 2000 haven't been as strong as hoped. However, business operating-system purchases traditionally have a much longer gestation period--waiting until all the testing has been done, budgets updated, and money and personnel allocated--which put them more on a year-to-18-month cycle than consumer products. Microsoft just reported that Windows 2000 sales are starting to take off. Additionally, it's now shipping key follow-up products--SQL Server 2000 and Exchange Server 2000.

By now, you've probably read at least one review or technical analysis of Office 10 Beta 1. Whether you find it's a compelling upgrade or not, there's another historical trend here: Sales of the current version always stall when there's a new version in the pipeline. Why upgrade twice when you can upgrade once? As business evaluations of Windows 2000 reach the jumping-off point and as Office 10 reaches shipping status--probably by the middle of next year--you'll see the results on Microsoft's bottom line.

So let me say it again. When you read news stories, use your common sense and keep the old adage in mind: "Don't believe anything you hear and only half of what you read." Except in InformationWeek, of course.

Stuart J. Johnston has covered Microsoft for more than 12 years. He can be reached at stuartj@halcyon.com.

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