The Software Savior?

Madonna's Ray Of Light, the official Windows XP launch song, is cued up. The conference rooms are waiting at 112 locations worldwide, from Beijing to the New York City hotel where Bill Gates will lead a pep rally. And Microsoft's well-oiled p.r. machine has even thought to haul out a new slogan, "Yes You Can"--reasoning that, in light of recent events, "Prepare to Fly" isn't quite right.

With this week's $200 million rollout of its XP operating system, Microsoft is showing once again that no one sells like Gates & Co. The software giant, which announced last week that earnings were down 42% from a year ago, needs XP to boost sales and anchor its all-important move into Internet commerce and services.

But the stakes in this launch are even higher for computer and chip manufacturers and makers of peripherals that were reeling from a decline in PC sales even before Sept. 11 and that have seen buyers virtually disappear since then. A huge chunk of the battered tech sector is counting on XP for a new breath of life.

It will not be easy. Unlike Windows 95, which came out at a time of peace and prosperity, Microsoft's newest operating system is landing in the middle of the slowest economy in a decade. The company's time-to-upgrade message is fighting for the attention of consumers distracted by war, hijackings and anthrax. Consumers have lost their sense of urgency about new technology.

After selling 500 million PCs over the past 20 years, the computer industry is seeing sales decline for the first time ever. Before Sept. 11, research firm IDC was predicting unit shipments in 2001 would slide 6.3% from last year, to 45.3 million, and the terrorist attacks could push fall sales down further. Dell, Compaq and the rest of the PC companies have so far cut--or announced plans to cut--46,000 jobs this year, or about 12% of the industry's payroll. Chipmakers have it worse. Their worldwide revenue is expected to plunge 20% to 30% this year.

Because the Windows system operates more than 90% of all PCs, new versions of the software have traditionally jump-started sales industry-wide by getting people into the marketplace. When Windows 95 came out, consumers lined up outside computer stores at midnight to get it; they wound up buying PCs, laptops and software like video games. In the first few months consumers bought more than 7 million copies, either as upgrades or installed on new computers. "Most of the past releases of Windows drove the market to the next level," says Kevin Winert, a marketing executive at Compaq. "We would love for that to happen again."

But industry analysts have their doubts. XP does have some new features, like one that gives household members their own passworded access to different versions of the same computer's desktop, and the new system delivers souped-up handling of photos, music and videos. But XP's main advantage over older Windows versions is improved reliability, some of it achieved by ditching the crash-prone Windows 95 and 98 code. "It's like an iceberg," says Mark Specker, an analyst at Soundview Technology Group. "All of its biggest improvements are below the surface."

And that may make the features too understated to win over the 63% of U.S. households that already have computers and need a compelling reason to trade up. "Regardless of how much money Microsoft spends to market it, this isn't a paradigm shift," says Bruce Kasrel, an analyst at Forrester Research, "and that's what it takes to get a really big boost in PC sales."

Yet some analysts say there is a real paradigm shift on the horizon: broadband Internet access, with which XP is very compatible. As consumers switch over to high-speed access over the next few years, they will start buying high-powered computers, digital cameras and music devices to take advantage of fast delivery of news and entertainment (for example, streaming news coverage of the war against terror, for those whose PCs aren't near a TV wired to cable).

The $200 million Microsoft is spending worldwide on TV, print and online advertising, along with hundreds of millions more in cooperative ads with partners like Intel, should produce at least a sales boomlet. It isn't likely to reverse the tech slump, but in these dark days, it could provide what Microsoft's marketing campaign promises: a ray of light.