Thoughts on the PC Slowdown

With slowing desktop sales hurting Microsoft's business, and Oracle's suite of enterprise applications exceeding expectations, a debate has begun over the future of the PC and corporate spending patterns. The Motley Fool has compiled several opinions on this subject.

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By Mike Trigg (TMF Tonto)
December 15, 2000

Late Thursday, in The Motley Fool's after-hours coverage of Microsoft's (Nasdaq: MSFT) second-quarter warning, Jeff Fisher stated, "The largest elephant of the technology herd has finally been shot and wounded." Microsoft cut sales and earnings for the current period and fiscal 2001 by 5% to 6%, citing, in part, slowing personal computer (PC) sales. After similar cautions from other PC-related companies -- including Intel (Nasdaq: INTC) and Compaq (NYSE: CPQ) -- that was indeed the case.

However, after Oracle Corp. (Nasdaq: ORCL) reported strong second-quarter earnings Thursday, some have begun to suggest that there has been a shift in technology spending, particularly considering that the company gave no indication of a macroeconomic slowdown. With slowing desktop sales hurting Microsoft's business, and the growth of Oracle's suite of enterprise applications exceeding expectations, a debate has begun over the future of the PC and corporate spending patterns. The Motley Fool has compiled several opinions on this subject, including some of its own, attempting to answer the question: What does the future hold for PC-related companies?

From Morningstar.com writer Joseph Beaulieu
"In our opinion, [Microsoft's] Thursday afternoon conference call raised more questions than it answered, especially since Oracle reported a fantastic quarter and asserted that it sees absolutely no slowing in its business. Given that Microsoft claims that its enterprise software business is doing fine, our guess would be that large corporations are shifting their spending priorities from new PCs and new operating systems (i.e., Windows 2000) into enterprise systems such as Oracle's new 11i e-business suite. We would therefore remain cautious until Microsoft reports its December quarter and provides more detail."

From Rule Breaker Co-Manager Brian Lund
We've seen Intel lower expectations 3% and 6% in the last two quarters, respectively. Advanced Micro Devices (NYSE: AMD) recently dropped its estimates about 8%. Now we have Microsoft's 5% to 6% warning. There's a slowdown going on.

It's far too early, however, to draw significant conclusions from it. U.S. and global economic conditions have been tough over the last six months, so IT (information technology) spending on hardware and software upgrades has slowed. That kind of belt-tightening on discretionary spending is to be expected. It does not mean that businesses are dumbing down their PC and moving to network appliances running e-business applications.

PC growth has stood at 19% annually over the last six years, and it will be about that this year. That's extremely fast. We should certainly expect slower growth in the future, but I don't think we'll see PCs become obsolete anytime soon.

From Merrill Lynch analyst Melissa Bildner
"Microsoft pre-announced a second-quarter revenue and earnings shortfall as moderated consumer and IT spending impacted sales of desktop applications, ad spending, and subscriptions. Microsoft's vulnerability to the PC market reaffirms our belief that Microsoft's continued success depends on its ability to transition itself from a desktop software company to an enterprise solution vendor. We remain cautiously optimistic on [Microsoft] as the company slowly transitions from its reliance on desktop software and continues to roll out its higher growth, server side software."

From Rule Breaker Co-Manager Paul Commins
When we speculate about the "death of the desktop PC," it's important to keep in mind the significant differences between the business and home markets. On the business side, there are powerful economic forces arrayed against today's inefficient status quo -- largely idle computing power and data storage on every desktop. In fact, when the personal computer first hit corporate America, data center managers fought it every step of the way. They knew that losing central control over processing, storage, software selection, maintenance, and support would cause total computing costs to skyrocket.

Until now, though, the corporate PC has more than earned its keep. Productivity increases have offset these greater costs. The costs haven't gone away, however, and with the advent of broadband network connections, distributed processing technology (like the JAVA programming language), and Internet-enabled business applications, it may now be possible to cut into these costs without diminishing the benefits. The competitive nature of business can drive this transformation through hurdles that would stop it dead on the consumer side. Regardless of how much employees love their stand-alone systems, when this convenience becomes a clear competitive liability, it's gone.

On the consumer side, the economics are much different. It will take clear, face-slapping advantages to get home users to even consider giving up their autonomy and, frankly, I don't see any advantages on the near-term horizon. So any talk of "death" in the home computing market is certainly premature. On the other side of the coin, though, the pace of growth in desktop software and computing power has leveled off, Microsoft's power to force upgrades has been eroded, and user demand for speed and functionality has shifted focus to the Internet. As a result, the practical lifespan of PCs does appear to be increasing, which has to be contributing to slower growth.

From Larry Dignan of ZDNet, citing the Microsoft conference call
"It didn't take long for analysts to give Microsoft CFO John Connors a question he really couldn't answer.

Analyst: Isn't the fundamental issue that desktop PCs aren't as critical as they used to be?

Connors: At the end of the day, the PC is the most important asset for the knowledge worker. Over the next six to 18 months, we need to ignite enthusiasm for the PC.

How Microsoft will get folks jazzed about commodity PCs is unclear. Microsoft is in the wrong place at the wrong time, with arguably the wrong approach. Microsoft said it has a strong product pipeline, but if the PC market is truly saturated it doesn't look good."

From Motley Fool Research analyst John Del Vecchio
The economic slowdown has adversely impacted many technology companies, particularly consumer names such as Microsoft and Apple (Nasdaq: AAPL). However, some technology sectors are more insulated from an economic slowdown. Information technology infrastructure spending is likely to remain strong. Infrastructure spending is not immune to an economic meltdown, but its importance in the Internet economy ensures that it will remain at the top of the list of IT budgets.

In today's networked world, companies have no choice but to interact more effectively with their customers, consolidate data across an organization, and improve operational efficiency. As a result, leaders such as Oracle, Veritas (Nasdaq: VRTS), and Siebel Systems (Nasdaq; SEBL) should still post respectable results in the face of a weakening economy.

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