Did Thai floods sink Windows sales?

Microsoft warns that floods drove down PC sales, but excuse won't wash for possible declining Windows sales. Look instead at shift to tablets, Macs

All the news services lit up yesterday with stories that Microsoft was warning of weak PC sales worldwide in the fourth quarter of 2011. Microsoft blames the floods in Thailand for the decline.

I have to wonder if there's more than a little self-serving wishful thinking floating around Redmond.

Here's how the news went down.

At CES Tuesday, Bill Koefoed, general manager of investor relations at Microsoft, gave a presentation at the JP Morgan Tech Forum. (Check out the audio recording on the Microsoft Shareholder site.) While Microsoft's keynote at CES could politely be described as "uneventful" -- at least as it pertained to Windows -- Koefoed's statement (at about 9 minutes into the transcript) rocked the house.

I would say if you even go back to the kind of PC market expectations that we had back in October, if you look at third parties, there were kind of, you know, call it mid single-digit expectations for [year-on-year growth in the worldwide] PC market if you go back to October. IDC and Gartner and some others kind of lowered that. I think they were kind of at minus one as they updated the PC market forecast in December. As the numbers come out, as the results are projected, you'll likely see that number decline further as the impact has been felt faster than I think people had anticipated. The OEMs are working hard, the supply chain is pretty resilient getting factories back up. I think some of the supply chain vendors have talked about how they are recovering faster than they had expected, but certainly it has had an impact on the PC market.

The implication to many analysts: Microsoft is telegraphing soft Windows sales for the fourth quarter of 2011.

Later on Tuesday, Tami Reller, CFO and chief marketing officer of the Windows division, talked at the Nomura breakout session at CES (audio recording is available), repeating what Koefoed said and adding (about 16 minutes in) "could there be some more adjustments? Definitely."

Microsoft's second-quarter earnings are due Jan. 19. If those results show a substantial decrease in the rate of Windows sales, what should we infer? That the floods did it?

I don't think that's the whole story.

Three weeks ago, Intel adjusted its earnings estimate downward for the fourth quarter, from $14.7 to $13.7 billion. The stated excuse, er, cause? The floods in Thailand. "The floods in Thailand have had an impact on the supply of hard disk drives and as a result the PC supply chain," according to Intel CFO Stacy Smith.

Clearly, as I've discussed before in Tech Watch, the floods in Thailand drove up hard drive prices and affected availability. Hardware OEMs went scrambling for hard drives and had to pay premium prices, no doubt making it much more difficult to bring down PC prices over the fourth quarter. The prices and availabilty of hard drives are improving, but damage was done just before the holiday rush.

If indeed there is a softening in demand for Windows, elevated prices for hard drives is just one contributing factor, not the whole demand-and-supply enchilada. Certainly tablets have eaten into PC sales to a far greater extent than most people would've projected just six months ago. And the MacBook Air has chomped off a bigger slice of notebook sales than many anticipated. Then there's the game-changing shift away from sales in North America and Europe and toward sales in China and Asia -- a move that eats away at Windows sales because many (if not most) PCs sold in China and other parts of Asia don't come with Windows pre-installed.

If a slowing in Windows sales is announced next week, the source of the shortfall makes a difference. The world is rapidly recovering from the effects of the floods; it's a temporary phenomenon. Not so the shift to tablets and Macs.

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