Peak PC and Microsoft's dilemma

Here's the big question: Does the personal computer industry stabilize, and if so, where?

Although a historic downturn in PC shipments has made headlines since April, "Peak PC" -- the moment when personal computers crested -- was two years ago, according to data from researcher IDC.

In the third quarter of 2011, global PC shipments totaled 96.1 million, slightly more than the following quarter's 95.8 million, IDC said. But shipments declined 4% in 2012 and are headed for an even larger dip of 8%, perhaps more, in 2013.

"It's very possible that that was the peak," said Bob O'Donnell, an analyst at IDC who is on the PC shipment tracking team, referring to the third quarter of 2011.

What's not clear is whether PCs are on an irrevocable slide or will reach a lower-level plateau and stabilize. O'Donnell believes the latter. "I do think that [the industry] can come up from where it is today," he said.

Lost momentum

Al Gillen, also with IDC, and one of several analysts there who cover Microsoft, agreed. "We're not predicting a continual contraction, the PC business has not gone into a free fall where years out it vanishes," said Gillen. "But what has happened, it's lost momentum."

Even so, IDC, which had predicted that the second half of the year would salvage the year from an even steeper decline and set the stage for a minor comeback in 2014, is now reconsidering. Its research rival Gartner sees the same trend.

O'Donnell said that the firm now suspects that the third and fourth quarters of this year will play out worse than previously anticipated. "The numbers are TBA," said O'Donnell.

Both IDC and Gartner are now convinced that 2014 will be the signal year for PCs. If shipments recover next year, 2013 could prove to be the rock bottom. Additional declines throughout 2014, however, could be debilitating for any business that overwhelmingly relies on the traditional desktop-plus-notebook model, especially Microsoft, whose Windows and Office depend on new PCs to drive growth.

Cautious optimism

IDC and Gartner remain cautiously optimistic that 2014 will be better for the PC business. Less than a month ago, Gartner pegged total PC shipments in 2014, including a separate category it labeled "ultramobile," at 329 million, or 1.1% higher than 2013's estimate.

Likewise, O'Donnell saw a silver lining in the second quarter's U.S. numbers, which were down just 1% year-over-year. "The U.S. is a bellwether, and we started to see some turnaround there last quarter," he noted. In the U.S., some of the improved numbers were driven by corporate upgrades from the soon-to-retire Windows XP, a process O'Donnell said could generate sales past XP's April 2014 end-of-life as many companies fail to meet the deadline.

But other experts disagreed with IDC's and Gartner's measured confidence that 2013 will be the toughest year the PC industry sees.

"Analyst firms have been expecting the PC industry to rebound for more than a year now," said Sameer Singh, an analyst who writes on the Tech-Thoughts blog. "I don't expect that to happen as the reason for this decline is an irreversible, secular shift in computing patterns."

From PCs to tablets

The shift Singh referred to was the one from traditional PCs to tablets. And in some cases -- particularly in emerging markets where PC ownership has never gained a foothold -- the pattern entirely abandons the idea of personal computers in favor of smartphones, and then as the logical upgrade, tablets.

Tablet shipments, said Singh, may outstrip PCs as early as the third quarter of this year, and no later than the fourth quarter.

Singh dubbed the trend "tablet-PC replacement rate," and believes that it points to the real possibility that PC shipments will, rather than uptick at some point, continue to contract, perhaps to a point where they average between 65 and just over 70 million units per quarter. If accurate, that would return the PC industry to shipment volumes of 2007-2008, and represent as much as a 28% contraction from Peak PC.

Peak PC chart
'Peak PC' (in red) was the third quarter of 2011, when more than 96 million personal computers came off factory lines. (Data: IDC.)
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