Y2K, euro could hurt high tech in '99

Or Y2K could have the opposite effect, sparking more buying. Execs at Comdex agree on one thing: We're in for a wacky year.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
5 min read
LAS VEGAS--The Year 2000 problem, unforeseen delays in Microsoft's next operating system, the conversion to the euro, and further turmoil in the worldwide economy could send the PC market into a trough next year.

Then again, they might not.

Instead, the need to bomb-proof networks against the Y2K bug could fuel a buying binge, especially in the first half of the year, resulting in 15 percent annual growth. Such growth could even pick up sluggish sectors such as Asia and Latin America, where customers are less prepared for--and therefore need greater assistance with--the Year 2000 crisis.

Who's to say? After all, computer vendors are experiencing a year-end uptick in demand that wasn't on the map a few months ago.

"This is going to be the most debated topic," said Craig Barrett, chief executive officer at Intel. "In March of 2000 we will all know what happened."

The only consensus that seems to exist is the idea that the traditional buying cycle will be stood on its head. Rather than relatively slow sales in the first half followed by a strong second half, first-half sales will be stronger than normal (and stronger than the second half) as corporations and large institutions try to complete their Y2K plans.

The second half will probably be comparatively light, executives suggest. Stragglers and smaller companies will be buying, but major corporations will begin to hibernate.

"There will be some pull-in of demand," said Michael Dell, chief executive at Dell Computer, meaning that customers will shift purchases to the first half.

Y2K fever could be an especially large boon to the big four PC makers, said Jacques Clay, vice president and general manager of Hewlett-Packard's extended desktop business unit, since customers may start to have concerns about the Y2K readiness of second-tier machines.

Still, Clay admitted that HP's projections for 1999 are largely up in the air. "We are trying to get ready for two scenarios," he said. "We could see high growth, where people must invest, or we could see low growth. It could be both."

The first-half bubble
"There will be a little bit of a bubble in the first half of 1999. Big corporations will be putting on the finishing touches on their Y2K plans," said Joe Marengi, senior vice president and group general manager for Dell. "Then there will be panic buying in the last six months."

"The third quarter is Christmas Eve," added Michael Takemura, North American desktop marketing manager for Compaq Computer, who speculated that the Y2K bug could have a substantial effect on normal buying patterns.

First-half growth may surge up to 30 percent on year-to-year comparisons, he said. The first half will also likely be stronger than the second halves of 1998 and 1999. By contrast, the historically robust third and fourth quarters "could be a little more flat year to year."

In the end, vendors could exit the year with growth in the 15 percent range, similar to this year, Takemura predicted.

While both Marengi and Takemura said that the Y2K bug largely affects servers and server sales, the issue will help fuel the desktop upgrade cycles. Institutions with old 386 machines, which are susceptible to the bug, will move to upgrade. The number of companies in this situation is relatively small, both said, but they exist.

Meanwhile, the normal PC buying cycle will be disrupted by the bug, even though Pentium-class machines aren't affected by it. Corporations are going to want to buy their annual allotments in the first half.

Notebook sales will follow a similar pattern. "We will have more robust sales in the first half and taper off a bit in the second half," said Rich Archuleta, general manager of the mobile computing division at Hewlett-Packard.

Consumer buying patterns will largely be unaffected by Y2K. Instead, the controlling issue in that market will be price, said Stephen Baker, an analyst with PC Data. And because prices are likely to continue to decline, buying will stay strong.

Windows 2000 comes into play
Unforeseen delays to Windows 2000 could have a dampening effect on demand as well, although the overall impact may be slight in the end.

Windows 2000, the company's next-generation operating system, is slated to come out in the spring of 1999, many said. If Microsoft makes its release target, corporations will still have an opportunity to qualify, or fully test and examine, systems running the OS, some observers said. Qualification is typically a mandatory prerequisite to purchasing for institutional buyers and can take 60 days or more, according to Takemura.

If delayed, however, the OS will come out when corporate buyers are moving into lock-down mode. This may prompt some to wait until 2000 on some purchases, according to various analysts.

Although the timing could present problems, Microsoft is ameliorating the situation through a massive beta program, said Dell's Marengi.

"They will ship 2 million units in the beta program," he said. As a result, the qualification period required for the final product when it ships could be relatively short because familiarity will already exist.

The Euro question
The conversion to the multinational currency system in Europe serves as more of a distraction than anything else.

But distracting it is. "They should have pushed the Euro until after Y2K," groused Micron Electronics chief executive Joel Kocher.

"Europe is not even close to being ready," he added. "It hasn't reached a fever pitch of urgency over there."

Work on the Euro conversion is preventing businesses in these countries from tackling the Y2K issue. This means greater potential for disaster when the clock turns, Kocher explained. It also means that the Europeans aren't buying hardware required to get around the bug, which impacts sales.

Nonetheless, it will be a secondary consideration. "The Euro may hit in the third quarter of 1999, but more people are looking at the compliance rollover factor," said John Rose, senior vice president of enterprise computing at Compaq.

"[The Y2K bug] could have an effect in the second half of the year," he added. Rose called the outlook for 1999 "mixed."

Despite all the factors, the overriding event will be changes in the macroeconomic picture. A downturn, or not, will completely upset projections.

"It all depends on the world economy," ventured Roger Kay, an analyst with International Data Corporation.