The shoes just kept dropping last month. The first landed when Gateway announced shortly after Thanksgiving that sales were disappointing and it wouldn't meet its revenue forecasts for the quarter or the fiscal year. Those looking for a second shoe to drop didn't have to wait long. In rapid succession, Apple, Compaq, and Intel disclosed similar shortfalls. Then Microsoft's boot dropped with a thud in mid-December, crushing any hopes for a strong fourth quarter. Graph 1 shows the range of revenue shortfalls announced in December 2000.

The Microsoft warning rattled the investment community for two reasons. First, Microsoft hadn't announced disappointing results in a decade. Second, the company blamed its shortfall not only on US consumer sales and the lackluster performance of both advertising and the pace of adding new subscribers at MSN, but also on slowing corporate sales. That information sent south the stock prices of other enterprise technology providers such as EMC and Sun Microsystems.

Microsoft's list of trouble spots, however, specifically excluded server software sales. John Connors, Microsoft's chief financial officer (CFO), noted that reduced expectations were more heavily weighted to desktop applications than to platforms, and that sales of Windows 2000 and its line of server products, such as SQL Server, were meeting expectations.

Leaders of other major enterprise technology providers also questioned Microsoft's perception of a general slowdown in corporate IT spending. Hewlett-Packard CEO Carly Fiorina said that although personal computer sales were slowing, she expected that HP would meet its revenue growth forecasts for the year. And IBM's Chairman Louis Gerstner pointed out in an interview that technology spending was shifting to new Internet tools rather than slowing down overall.

So what the heck is going on? And more importantly—why? First, the rate of growth in desktop PC sales in both the home and business markets is clearly less robust than expected. Preliminary data compiled by the research group PC Data, indicated a drop of 12 to 15 percent in consumer PC sales in the United States in November 2000 compared to the previous year. IDC also scaled back its growth forecasts. Graphs 2 and 3 show IDC's third quarter PC sales numbers.

These figures reveal an 11 percent growth in the market in the United States and almost 19 percent growth worldwide. Although not bad, the numbers trail forecasts.

In my analysis, the convergence of several factors triggered the slowdown. First, the Y2K scare, which motivated companies to jettison older PCs rather than making them Y2K compliant, artificially pumped up desktop computer sales in the corporate space. Second, Internet-access deals for the home market enabled consumers to buy low-end PCs for little more than the cost of a 3-year subscription to MSN.

In addition, corporate attention has shifted to large-scale infrastructure issues, including building faster networks and figuring out how to make companies more Web-centric. As for the desktop, the attitude seems to be "if it ain't broke. . . ." On the consumer front, because few people have broadband in the home, most remain content with the computer they purchased when they first decided to jump on the Internet. Consequently, neither corporations nor consumers felt inspired to open their wallets last quarter. And the threat of an overall economic slowdown stopped any end-of-year, budget-clearing, blowout spending.

The final factor fueling the current slowdown has to do with the nature of the corporate IT market itself. Pundits often debate whether the technology market is cyclical. The correct answer is yes and no. Three compelling reasons to invest in new technology marked the 1990s:

  • the release of Windows 3.0, which provided an effective GUI for the bulk of corporate desktops
  • the introduction of Office for Windows, which facilitated data movement among application programs
  • the emergence of the Internet as a required channel of communication

These rapid-fire advances masked the cyclical nature of the industry. The corporate IT market is cyclical only when the rate of innovation slows. Currently, we are in a brief lull between compelling reasons to upgrade.

But this static period is rapidly ending. The proverbial canary in the coal mine in this case is Napster, the technology to share music files. It requires a high-speed connection to the Internet, an enormous hard disk, and adequate processing power. This suggests that as broadband access to the Internet expands and companies grow more Web-centric, demand will build for additional desktop upgrades. Then we'll see upgrades with better access to information—larger and better storage networks and improved, secure access—better screen technology, and even more processing power.

Remember, when IBM's first mainframe computer rolled off the assembly line, some thought the worldwide market for computers was five. In the mid-1980s, many observers thought that anybody who would ever need a PC already had one. In retrospect, saturation is never an option.