As PC sales tank, what's Microsoft's Plan B?

Market analyst IDC pins much of the blame for the drop on Windows 8. Microsoft, though, can only double down the bet on its new operating system.

Jay Greene Former Staff Writer
Jay Greene, a CNET senior writer, works from Seattle and focuses on investigations and analysis. He's a former Seattle bureau chief for BusinessWeek and author of the book "Design Is How It Works: How the Smartest Companies Turn Products into Icons" (Penguin/Portfolio).
Jay Greene
3 min read
Microsoft's Surface tablet. Josh Miller/CNET

When market analyst IDC last week noted the sharp 13.9 percent quarterly drop in worldwide PC sales, it placed much of the blame on the "radical" user interface changes of Microsoft's new Windows 8 operating system.

"Microsoft will have to make some very tough decisions moving forward if it wants to help reinvigorate the PC market," Bob O'Donnell, IDC's program vice president for clients and displays, said in a statement.

Therein lies a core challenge for Microsoft. The software giant doesn't really have a plan B.

Microsoft can't undo the new look and feel of Windows 8, which, according to IDC, is at the heart of the PC sales decline. It takes the software giant three years, if its engineering and testing machinery is humming, to produce a new operating system.

For now, Microsoft seems to be pushing for patience. The company points to the 60 million Windows 8 licenses it sold in the first few months of the operating system's life. And it suggests that hardware partners will debut new Windows 8 devices in the coming months that will capture consumer interest.

"The PC market is evolving and highly dynamic," a company spokeswoman said. "Today's PCs come in multiple forms -- from highly mobile Windows 8 tablets that function like full PCs, to convertible laptops with long battery life, to multitouch all-in-ones that revolutionize the desktop PC.... Along with our partners we continue to bring even more innovation to market across tablets and PCs."

Microsoft is essentially doubling down its bet on Windows 8. And there have been a handful of attractive new devices -- most notably Microsoft's own Surface tablet -- that have won plaudits from reviewers. The problem for Microsoft is that consumers just don't seem to care.

Windows 8 hasn't been helped by the headwinds that face PC sales overall. According to IDC, shipments of Apple computers, too, fell 7.5 percent in the first quarter. (Though, rival firm Gartner said Mac sales climbed 7.4 percent in the quarter.) Companies and consumers seem to be willing to hold onto their computers longer than they have historically, spending their tech budgets instead of mobile devices such as smartphones and tablets.

Microsoft, which long dominated techdom as the powerful force behind Windows, continues to see that influence erode as consumers shift to a multidevice world. It's not that consumers don't want PCs; more than 300 million will likely be sold worldwide this year. But consumers continue to realize that smartphones and tablets, where Microsoft has been trumped by both Apple and Google, handle many tasks better than PCs.

That means the "planned obsolescence" that Microsoft and its longtime partner Intel worked so hard to orchestrate for decades, is disappearing. With more and more applications running online, and smaller devices handling a larger share of consumers' tasks, the reason to upgrade PCs has diminished.

"People will buy new computers when they just want to or can't live with the old one any longer," Forrester analyst Ted Schadler wrote. "The average replacement cycle may be 6 years instead of 4 years in the home and 4 years instead of 3 years at work."

None of this bodes well for Microsoft as it prepares to report its third fiscal quarter earnings on Thursday. Nomura Securities analyst Rick Sherlund, one of the longest tenured Microsoft analysts on Wall Street, downgraded his rating on the company's stock to "neutral" from "buy" after IDC, along with Gartner, reported the PC sales slide last week. His rationale: "Windows 8's sluggish adoption and the absence of compelling new hardware."

Like Microsoft, Sherlund believes relief could come with new devices later this year. He points to Intel's upcoming Haswell processor that will extend battery life, something that could lure consumers to upgrade laptops. But even Sherlund acknowledged some uncertainty, advising shareholder to "sit on the sidelines and reassess the upgrade cycle as we go into the second half."

Microsoft and its hardware partners, of course, don't have the option. And Windows 8, which was supposed to breathe new life into the PC business, appears so far to be sucking wind from it.