Gloomier PC forecast means more trouble for Windows

But Microsoft has plenty of 'cards to play' to maintain overall revenue, says analyst

IDC today drastically lowered its forecast for PC shipments in 2013, a prediction that if accurate means more bad news for Microsoft's Windows 8 operating system.

"Lower PC sales are certainly not a positive for Microsoft," said Loren Loverde, an analyst at IDC who heads the research firm's PC tracking data group. "This will have a direct impact on Microsoft."

IDC, which earlier this year had assembled a rosier forecast, predicting that shipments would slightly increase in the second half of 2013 to end the year down only 1.3% compared to 2012, revised its estimates today.

According to the new forecast, PC shipments will decline 7.8% in 2013, drop another 1.2% in 2014, and along with the 4% decrease already posted for 2012, create an unprecedented three-year contraction. Not until 2015 will the industry show shipment gains, when the market expands by an estimated 1.4%.

Even in 2017, as far out as IDC looks into the crystal ball, the PC shipment total of 333 million will still remain below 2012's 349 million and 2011's peak of 363 million.

Because Windows revenue usually stays in sync with PC shipments, the sharp downturn in the latter will certainly be reflected in Microsoft's financials, agreed Loverde.

Microsoft has already taken a beating over Windows 8, not because of falling revenue in the division -- in the first quarter, income after adjustments was flat even as PC shipments plummeted 14% -- but because the upgrade did not boost hardware sales, as has been past habit.

Other IDC analysts, in fact, have blamed Windows 8's lukewarm reception for a big part of the PC industry's malaise.

Loverde backed off that today, saying that Windows 8 was only one of several contributing factors IDC had taken into account when it released its Q1 estimates.

The revised, and much gloomier, forecast, was prompted not only by those factors -- Windows 8's performance, economic uncertainties, lack of compelling hardware that took advantage of the touch-enabled OS -- but also by the realization that the shift toward mobile would be more substantial than expected.

"There's a fundamental shift under way in how people are computing," Loverde asserted. "Computing is much more mobile, people's priorities are shifting, and that trend doesn't seem to be turning anytime soon."

While PCs aren't going away -- something Loverde stressed even as IDC predicted a plunge in shipments this year -- tasks that now are considered core to computing, including social network interactions, photograph taking and sharing, and email can be accomplished on non-PC devices like smartphones and tablets.

In other words, IDC sees the PC's chief chores shrinking in number, resulting in fewer purchases by consumers and corporations as users and businesses stretch out replacement cycles or in some cases, simply swear off PCs.

"[People] are putting a premium on access from a variety of smaller devices with longer battery life, an instant-on function, and intuitive touch-centric interfaces," added Loverde in a statement that accompanied the revised forecast. "These users have not necessarily given up on PCs as a platform for computing when a more robust environment is needed, but this takes a smaller share of computing time, and users are making do with older systems."

That's not good for Microsoft. Although the Redmond, Wash. developer continues to push its way into tablets -- through its own Surface devices and those by its OEM partners -- the bulk of Windows revenue still comes from equipping desktop and notebook PCs with licenses.

An 8% drop in PC shipments during 2013 would, assuming Windows sales mimic that exactly, mean a $1.4 billion hit to Microsoft's revenue for the calendar year. (For the calendar year 2012, Windows revenue contracted by about 5% from the year before, closely matching the 4% decline in PC shipments pegged by IDC.)

But a knock that hard is unlikely, Loverde suggested. "Microsoft has a number of cards to play," he said, pointing out the growing revenue of its Server and Tools division, an expectation that sales of Windows 8-powered and Office-equipped "slate"-style tablets will increase, and that Office will not mirror Windows' decline, as three of those cards.

"This shift [in computing] will not undermine the Office franchise," Loverde said, citing Microsoft's ability, if it wanted, to monetize Office online and expand the suite's footprint on tablets. Most analysts believe Microsoft could, for example, reap significant revenue by releasing Office for Google's Android or Apple's iOS, or by tying tablet editions on those platforms to its Office 365 subscription programs.

"We've taken expectations down," said Loverde. "It is a bit sobering. We look at technology as a growth area, and so we think PC [sales] should continue to grow. But this is a major disruption, and a complete change of the landscape."

This article, Gloomier PC forecast means more trouble for Windows, was originally published at Computerworld.com.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

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