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PC outlook darkens as sales slump deepens in 1Q

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(AP file)
In this Friday, October 2012 file photo, a woman walks past laptop computers running Microsoft Windows 8 operating system during its launching ceremony in Hong Kong. Research firm IDC says PC global shipments of PCs fell 14 percent in the first three months this year. The appeal of tablets and smartphones is pulling money away from PC sales, but it also blames Microsoft's latest version of Windows, which forces users to learn new ways to control their machines.

SAN FRANCISCO – The ailing personal computer market is getting weaker, and it’s starting to look as if it will never fully recover as a new generation of mobile devices reshapes the way people use technology.

The latest evidence of the PC’s infirmity emerged this week with the release of two somber reports showing unprecedented declines in sales of desktop and laptop machines during the first three months of the year.

As if that news wasn’t troubling enough, it appears that a pivotal makeover of Microsoft’s ubiquitous Windows operating system seems to have done more harm than good since the software was released last October.

“This is horrific news for PCs,” said BGC Financial analyst Colin Gillis. “It’s all about mobile computing now. We have definitely reached the tipping point.”

First-quarter shipments of PCs fell 14 percent worldwide from the same time last year, according to International Data Corp. That’s the deepest quarterly drop since the firm started tracking the industry in 1994. Another research firm, Gartner Inc., pegged the first-quarter decline at 11 percent.

The deviation stemmed in part from the firms’ slightly different definitions of PCs.

No matter how things are parsed, the PC market is in the worst shape since IBM Corp. released a desktop machine in 1981. PC sales have now fallen from their year-ago levels in four consecutive quarters, a slide that has been accelerating even amid signs that the overall economy is getting healthier.

PCs are going out of style because they typically cost more than smartphones and tablets, and aren’t as convenient to use. Most PCs sell for $500 to $1,500 while the initial out-of-pocket expense for a smartphone runs as low as $99 while an array of tablets sell for $200 to $300.

Apple’s late CEO Steve Jobs, whose company propelled the mobile computing revolution with the 2007 release of the iPhone, declared that the world was entering a “post-PC era” shortly after the iPad came out three years ago.

In a June 2010 appearance at a technology conference, Jobs likened challenges facing the PC industry to what happened to trucks in the U.S. decades ago as a shift away from farming caused more people to move into cities where they wanted to drive cars instead. “I think PCs are going to be like trucks,” Jobs predicted at the time. “Less people will need them.”

The traditional PC still has a long way to go before it becomes obsolete.

Despite the dismaying start in the first quarter, more than 300 million PCs are still expected to be sold worldwide this year. Tablet computers, a category that was insignificant until the iPad came along, is catching up rapidly: Nearly 200 million of those deices could be sold this year. Meanwhile, worldwide smartphone sales could surpass 1 billion units this year, Gillis predicted.

PC sales could be undermined even more during the next few years with the release of “wearable computing” devices that connect to the Internet through voice-activated equipment attached to glasses and wristwatches.

The growing reliance on mobile devices is creating new opportunities and tensions throughout the technology industry. Internet companies such as Yahoo Inc. and Facebook Inc. that initially designed their digital services to be primarily consumed on PCs have been scrambling to tweak things so they work better on smartphones and tablets.

But the companies most threatened by the mobile upheaval are those that depend on PCs to make most of their money. This group includes technology heavyweights such as Windows maker Microsoft, PC makers Hewlett-Packard Co. and Dell Inc. and PC chip maker Intel Corp.

“It’s time for these companies to make some critical decisions and ask themselves, ‘How are we going to turn this ship around?’” said technology industry analyst Patrick Moorhead.

Microsoft Corp. CEO Steve Ballmer thought he had come up with a tonic last fall when his company released a radical new version of Windows last fall. Windows 8 has a completely new look that’s similar to the design of the software running the most popular smartphones and tablet computers. The overhaul requires a relearning process, a leap that many consumers and corporate buyers aren’t ready to take.

All signs so far point to Windows 8 being a flop.

“Unfortunately, it seems clear that the Windows 8 launch not only didn’t provide a positive boost to the PC market, but appears to have slowed the market,” IDC Vice President Bob O’Donnell said.

The newest version of Windows is designed to work well with touch-sensitive screens, but the displays add to the cost of a PC. Together, the changes and higher prices “have made PCs a less attractive alternative to dedicated tablets and other competitive devices,” O’Donnell said.

In a statement, Microsoft described the PC market as “evolving and highly dynamic.” Referring to a number that it has previously released, the company said it has sold more than 60 million copies of Windows 8 so far. That is “a strong start by any measure,” Microsoft said. “Along with our partners we continue to bring even more innovation to market across tablets and PCs.”

In its tally, IDC excludes tablets, even if they run PC-style software. It also excludes any device that has a detachable keyboard. With the release of Windows 8, PC makers have been reviving their experiments with tablet-laptop hybrids, some of which have detachable keyboards. Consumers are likely to have shifted some of their buying away from traditional laptops and toward these new devices, which means that the total sales decline of Windows-based devices might not be quite as drastic as IDC’s numbers suggest.

Windows 8’s poor sales start could amplify periodic calls for Microsoft to replace Ballmer, who replaced company co-founder Bill Gates as CEO nearly 13 years ago. “This puts a lot more pressure on Ballmer because Windows 8 is at the epicenter of all this,” Moorhead said.

Microsoft, which is based in Redmond, Wash., will take questions from industry analysts April 18 when it’s scheduled to release its latest quarterly results. Ballmer usually doesn’t participate in those sessions.

Microsoft shares fell 55 cents, or nearly 2 percent, to $29.73 in extended trading, after the release of the sales reports.

Hewlett-Packard., the world’s largest PC maker, saw a 24 percent drop in shipments in the first quarter compared with the same period a year ago. That was HP’s steepest quarterly decline since the company bought rival PC maker Compaq a decade ago.

HP shares fell 60 cents, or 2.7 percent, to $21.72 in extended trading.

Meanwhile, the industry’s No. 2, China’s Lenovo Group, is benefiting from sales to first-time buyers in China and other developing countries. As a result, it held sales steady, alone among the world’s top 5 PC makers, according to IDC’s figures.

Dell Inc., the third-largest PC maker, suffered an 11 percent decline in the quarter. The bad news could be helpful to the Round Rock, Texas, company’s attempts to sell itself for $24.4 billion to a group that includes CEO Michael Dell. Some shareholders believe the proposed sales price of $13.65 per share is too low, but Dell’s board has argued it’s a generous offer, given the deteriorating conditions in the PC industry — a point that may carry more weight now that the latest sales numbers are out.

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