Microsoft (MSFT) Windows 7 And The Renewal Of The PC Industry

Microsoft (NYSE:MSFT) Windows 7 sales in the first week after its introduction last month outdid Vista sales during the first week after its launch in January 2007 by 234%, according to industry research firm NPD. Microsoft has certainly encouraged the rumors that the operating system is doing well, but that no longer appears to be an empty boast.

The question that the PC industry, which has been caught in a slump, needs to have answered is whether Windows 7 sales will help revive the purchase for laptops and desktops. Alternatively, companies and consumers could be buying the software and loading it onto the old computers.

Most of the early evidence is that Windows 7 should produce a relatively sharp increase in computer sales in the fourth quarter. Industry group Gartner expected PC units shipped worldwide to drop 5% in the third quarter. Sales were actually up about a percent which was better than expected to almost 81 million units.

Gartner explained that falling PC prices and the rise in the sales of netbooks, which often cost less than $300 each, helped drive demand. The firms that did the best last quarter were Hewlett-Packard (NYSE:HPQ), Apple (NASDAQ:AAPL), and Acer. That group of three is unusual because there is no pattern in pricing among the three companies. Apple PCs are usually at the highest end of the price range, HP in the middle, and Acer at the bottom. The recovery is broad-based, in other words, and not restricted to one portion of the industry.

Windows 7 was being pre-sold in the third quarter, which may have helped move PCs, but it is likely now that it is available to buyers immediately with each PC purchase, so that Windows should do even more to support a recovery in the computer industry. The strong reviews Windows 7 got and the fact that a number of businesses and consumers want to get the unloved Vista off their machines should accelerate the demand for new software on which Windows 7 is loaded.

PC sales may also be helped by the normal replacement cycle which was thrown off by the recession. The typical computer is probably older than it has been at any time in the last decade. PC prices are falling. That is good news in general. Two forces are driving replacement and not just one.

What no one is certain about yet is whether the rush to get Windows 7 will help all PC companies the same or whether some will do better than others as the industry improves. Dell (NASDAQ:DELL) will continue to do badly, if recent history is any indication. The company has still shown no promise by manufacturing models that the public finds hold up well next to HP products and Apple Macs. Acer and Lenovo have improved their computers and seem to have the advantage of lower cost labor. Mac sales in particular should be taking market share from Dell. Apple’s most recent quarterly earnings show that Mac sales are actually accelerating.

Microsoft’s earnings should be better than expected in upcoming quarters. The same will almost certainly true for the PC hardware companies, with the notable exception of Dell.

Douglas A. McIntyre