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Windows XP no panacea for PC makers

Companies are scrambling to find new ways to sell computers because Windows XP isn't expected to draw as many buyers as earlier versions.


Hardware: No free ride for PC makers

By Joe Wilcox
Staff Writer, CNET
October 24, 2001, 4:00 a.m. PT

Even with $1 billion in marketing, Windows XP will be no panacea for beleaguered computer manufacturers.

Many corporations--by far the largest customers for PC makers--have little incentive to spend millions of dollars on the new operating system, having just bought new equipment in anticipation of the dreaded Year 2000 bug. Even if they are inclined to try Windows XP, the economic slowdown has put technology purchases on hold.

As a result, with computer shipments and profits at record lows, desperate PC companies are focusing on the volatile consumer market, hoping that such Windows XP features as improved streaming media, CD burning, online photo processing, wireless networking, and instant messaging with telephony and videoconferencing will inspire people to buy more powerful hardware that can handle these functions.

But it is unclear whether those features, while tempting for many, will provide enough incentive for consumers to dump their older systems for expensive new computers and peripheral devices such as cameras, printers, scanners and other equipment designed to take advantage of all Windows XP has to offer.

"I believe it is essential for home PCs to be delivered with as much pre-installed communication and media playback software as possible. Doing so ensures that novice users will be able to enjoy the full benefits of new technologies without having to deal with installation procedures," said Dave Hammond, a technology manager in Woodbury, N.Y. Yet he doesn't see those new features as a necessary catalyst for sales: "None would compel me to switch to XP."

In many ways, computer companies have fallen victim to the disruption of a long-running software-hardware upgrade cycle that has perpetuated the growth of both industries. For years, PC manufacturers and chipmakers have sold increasingly powerful equipment necessary to run new versions of resource-hungry Windows operating systems.

XP, however, may be the first operating system since Windows 95 that can work adequately with older PCs for the vast majority of consumers. Even Microsoft seems to have gone out of its way to stress this point, perhaps recognizing that corporations and consumers have grown tired of the seemingly endless need to buy new equipment.

"It's not exactly the easiest of times to be selling PCs," NPD Intelect analyst Stephen Baker said. "Microsoft is spending a lot of money to announce and generate demand for XP. Companies that want to take advantage of that are going to have to be aggressive, and that means doing things in new ways."

For example, taking a page from Apple Computer's marketing playbook, PC makers will put more emphasis on what consumers will be able to do with Windows systems rather than simply touting such raw performance resources as processor speeds, storage capacity and memory levels used for Web surfing, letter writing and other basic functions. Specifically, the message will underscore the entertainment value of a computer running Windows XP.

Plethora of peripherals
Three PC makers stand out from the pack in this marketing trend: Gateway, Hewlett-Packard and Sony.

HP is banking on a potential boom in the sale of such related equipment as printers, digital cameras, CD writers and recordable DVD drives, all of which could be offered in package deals with computers. The company hopes that consumers will tie these kinds of products together with Windows XP's new wireless networking features, creating a demand for equipment that combines entertainment with practical functions.

"By the time Windows XP ships we will also be introducing a new wireless home-networking product line," said Rob Wait, business manager for HP's Consumer Business Organization. "Windows XP is like the last element needed to be able to start to proliferate PCs in any room in the home."

That makes particularly good sense for HP and other PC makers that sell their own branded peripherals, analysts say.

"The focus will be on new things added to the operating system and new perceived advantages," Baker said. "HP has great brand recognition in printers and other peripherals that fit right into this kind of message."

Gateway has taken that approach a significant step further with its nearly 300 "Gateway Country" stores. Already, the company organizes these retail outlets based on specific PC uses, such as digital music, moviemaking or home finance--all areas that will see improved performance and new features in Windows XP.

Following Apple's strategy, Gateway's retail outlets are broken into sections supporting its YourWare initiative, "where we've been focusing on PhotoWare, MusicWare, VideoWare, as an example. We've been trying to focus on an entire solution," said Mike Ritter, Gateway's vice president of product marketing.

The Poway, Calif.-based PC maker has adopted this strategy because it realizes that computers no longer fly off the shelf when Intel releases a new processor or Microsoft a new OS. More than ever, PCs must be sold--and for a specific purpose, Ritter emphasized. For this reason, Gateway will be tailoring its Windows XP advertising rather than taking a broader approach, as it has in the past.

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"Gateway is in a much better position than HP because HP has traditionally been so bad in how it's bundled its hardware together," said Context analyst Jeremy Davies. "I am very impressed with the Gateway stores, with the different areas. You have your student area, home or tax expert area, and that kind of stuff. That's the way you do it: You give people solutions."

If Sony has a solution, it's entertainment. After all, the Tokyo conglomerate made its name in consumer electronics, becoming synonymous with a postwar generation of Japanese-made TV sets, transistor radios and stereo systems. In fact, the reason Sony got into the computer business in the first place was to protect and expand its electronics franchise, not the other way around.

Many of Sony's digital products--cameras, camcorders and MP3 players--will work with Windows XP without the need for additional applications or software drivers. For instance, moviemaking or video editing using high-speed IEEE 1394 ports will be made easier with the new operating system.

But Sony has no plans for "hard bundles," as the company calls them. Chris Pollitt, marketing director for Sony's Vaio line of notebooks, said, "With cameras or camcorders that would be quite difficult."

Or, in Sony's case, expensive. The company's multimedia equipment, like all Sony products, is typically among the highest-priced on the market.

In some ways, Sony is positioned between Gateway and HP. Although it does not have Country-type stores dedicated to specific PC uses, Sony is tailoring special areas for its products at such retail chains as Best Buy and Circuit City. And like HP, Sony sells many peripheral devices under its brand that could be made to work best with Windows XP.

If it's built, will they come?
Yet it remains to be seen whether consumers will rush to buy such devices simply because Windows XP has features that work with them. "In the case of XP, it's not likely you'll buy something and add things on later. There's not enough there to make you want to do that," Context's Davies said.

That would be bad news for all PC manufacturers, for they would have few other markets to target for their sales.

In the corporate arena, many businesses that might normally be counted on to buy new equipment are not likely to do so anytime soon. Those companies already running Windows 2000 will find that XP offers little significant change--in the worst cases providing not much more than additional memory.

"Windows 2000 was a major upgrade from Windows 95, 98 and NT," said Mark Romanowski, senior vice president with New York-based IT consultancy AMC. "When Windows 2000 came out last year there were major implications. Systems just would not function. You would have to scrap systems and buy new ones because the hardware upgrade price was just too high."

These businesses could move to XP with relative ease because they have already paved the way with the painful transition to Windows 2000, but they have scant justification for doing so. Even those businesses that are interested in XP are not expected to make the jump right away because they are still only partway through the anticipated life cycle of 2000.

"Those companies that have 2000 rollouts going on, they're going to continue," Gartner analyst David Smith said. "It wouldn't make sense for a company halfway through its 2000 upgrade to switch to XP. There's not a lot of difference between the two, from a corporate perspective."

George Fiala, a direct-marketing executive from Brooklyn, N.Y., said he has no reason to purchase new hardware or software after recently buying a new 1.4GHz Athlon PC with 512MB of RAM and a 40GB hard drive. "I will not be upgrading to XP," he said. "Windows 2000 is just fine for me."

None of this is lost on the major computer companies. Some say privately that refining their marketing strategies has been as much art as science.

Most troublesome is the overall economic situation, which has frozen spending on purchases across the board, from Fortune 500 companies to parents who might otherwise be looking to buy their children's first computer. Flagging consumer confidence has worsened since Sept. 11.

After the terrorist attacks in New York and Washington, many companies made major changes at the height of their marketing campaigns for the Oct. 25 official release of Windows XP. Sources familiar with Microsoft's marketing plan said the company scrambled to tone down its main New York launch event and to dump one suggested slogan: "Prepare to fly."

Still, even the recent tragedies have not stopped the $1 billion juggernaut of direct advertising or co-marketing surrounding Windows XP by Microsoft and other interested parties. If anything, these uncertain times have spurred hardware and software makers to do whatever they can to survive.

Companies can no longer assume they can sell PCs "lined up by price and processor," Sony's Pollitt said. "That's the old way of doing business."'s Ian Fried contributed to this report.

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Bundles of features

Some PC makers will offer a variety of peripherals and computer-component bundles specifically designed to harness new Windows XP features.

Sony will offer rebates when people buy digital cameras or camcorders with select Vaio consumer PCs:

• A Vaio PC RX550 desktop with a 1.5GHz Pentium 4 processor, 256MB of RAM and a 60GB hard drive, bundled with an HMD-A200 17-inch monitor and a DCR-TRV230 camcorder, for $1,910 after $220 in rebates.

• A Vaio FX390 notebook with a 1GHz Pentium III processor, 256MB of RAM, a 30GB hard drive, a combo DVD/CD-RW drive and a 15-inch display, bundled with a DSC-F707 digital camera and an NW-MS9 Walkman, for $3,324 after $175 in rebates.

Gateway, by contrast, has broken out specific bundles--including Country store training courses--that can be added to any Windows PC:

• The music option includes CD Stomper Pro CD Labeler software, 50 blank CD-R discs, MusicMatch Jukebox Plus software, and the "Using Your PC to Explore Digital Music Your Way" training course for $60.

• Photo enhancement comes with MGI PhotoSuite 4 Platinum Edition software with Gateway Photo Center access, Kodak Premium Picture Paper, and the "Using Your PC to Explore Digital Photography Your Way" training course. Fuji's FinePix 2300 digital camera for $350 or the Epson Perfection 1250 Scanner for $200 is available with the kit.

Hewlett-Packard, like Gateway, is offering bundles that can be added to Windows XP PCs but is sweetening the deals with rebates:

• Customers get a $150 rebate when buying an FX-series monitor or $100 off other select monitors with any Windows XP PC.

• When buying with the PC select inkjet printers, all-in-one machines, a scanner, a digital camera or a photo printer, customers get a $50 rebate.

—Joe Wilcox