For Windows XP Launch, Timing Hurts

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Art Kuller is a typical small business owner in these lean times.

With purse strings tightened considerably, the president of the Snoqualmie high-tech company MicroConnex is willing to invest heavily in certain must-haves: a state-of-the-art laser for manufacturing or keeping the right highly skilled employees on his 18-member staff.

But he won't be shelling out cash for any nonessentials — including upgrading the company's 27 computers to Windows XP, Microsoft Corp.'s new desktop operating system.

"There are some nice things -- the integration with the Internet would be nice," Kuller says of the new system. "But at the moment it's got to be better than just, 'It would be nice."'

Consumer confidence is plunging and even the most stable U.S. companies are reining in spending. Everyone's worried about national safety and no one wants to go shopping.

It's not very good timing for Redmond-based Microsoft, which is gearing up for Windows XP, its biggest consumer and business launch of the year.

"It's a daunting marketing task," says Rob Enderle, an analyst with Giga Information Systems.

Microsoft already had reason to be concerned about the launch — officially set for Oct. 25 — before terrorist attacks rattled the nation on Sept. 11.

The economy was already in a slump, and forecasters, including those at Microsoft, were predicting record-low growth for personal computer sales — a key market for the software giant because most new PCs will come pre-loaded with Windows XP.

Plus, the company faced an antitrust trial over its dominant Windows operating system, and growing grumbling from the business community about a new software licensing agreement aimed at prompting more regular system upgrades — and potentially costing companies more money.

The economic fallout of the terrorist attacks, however, have financial woes spreading fast into traditional industries, prompting mass layoffs and cutbacks across the board.

Now, the high-tech research firm International Data Corp. has reduced PC sales growth expectations for the down to just 3 percent, compared to 11 percent growth last year.

In such a climate, Enderle says, if companies are making any technology purchases at all, they are thinking about communications gadgets such as videoconferencing — to save money and reduce travel — and Internet security tools to protect from a possible terrorist hacker threat.

"At the end of the day there are a lot of things (companies) want to do," he says. "Paying Microsoft more money is going to be No. 53 on that list, or not even on that list."

Consumers also will be too distracted by current events -- and worried about layoffs -- to go out and buy new computers or operating systems.

"That's the last thing you're really going to spend money on, the PC -- as long as it's working and as long as it's cranking out resumes," says Scott McAdams, analyst and president of McAdams Wright Ragen in Seattle.

Microsoft remains undeterred. The fact that there are concerns about the economy "is even a bigger reason for Microsoft to step up and push this product," says Jim Cullinan, lead product manager for Windows XP.

Cullinan says the company has tweaked the language of its marketing plan slightly to reflect the somber mood of the country. Otherwise, it is moving forward with an aggressive, $1 billion campaign to sell Windows XP, determined to show the product can save companies time and money, and make consumers happy.

"We remain steadfast in believing that Windows XP will be warmly received," he says.

The company declines to reveal specific sales expectations.

The news is not all bad. Analysts have reduced short-term expectations for Windows XP, but they acknowledge the vast majority of companies are dependent on the Windows operating system and will have to upgrade at some point.

"The economy and the impact of the terrorist attack I think is definitely going to take some of the edge off the product in the immediate term," McAdams says.

But he is predicting that the system will gain momentum over the next 18 months, out of necessity if nothing else.

"For almost the last 12 months ... a lot of tech spending has been on hold, and you can only do that for so long when you have to start going back to the wells because things aren't working," he says.

Indeed, while analysts say many businesses will react like MicroConnex, others will see the new operating system as a relatively inexpensive way to boost productivity.

Bob Frause, president of the Seattle public relations firm The Frause Group, has just eight full-time employees and 10 computers, running everything from Windows 95 to Windows ME. He's decided a full upgrade will help everyone work better together.

"I just think that we all need to be on the same sheet of music," Frause says.

Microsoft has another edge with this product. Businesses typically have been shy of immediately upgrading to new Windows systems because of glitches in early versions of Microsoft software. Windows XP, however, is built on the same stable technology found in its last release, Windows 2000.

"It's going to be very much like Windows 2000 release two, and that makes it less risky," says Al Gillen, an analyst with IDC.