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Holiday PC sales slide for first time in 5 years

Dell XPS 12 Convertible PC
Dell's XPS 12 Convertible was among the Windows 8 PCs released last fall.Dell

Holiday-season sales of personal computers fell for the first time in more than five years, according to tech industry tracker IDC, as Microsoft's new Windows 8 operating system failed to excite buyers and many instead opted for tablet devices and smartphones.

The slump caps a miserable year for PC makers such as Hewlett-Packard Co, Lenovo Group and Dell Inc, which saw the first annual decline for more than a decade with no immediate signs of relief.

It underscores an unspectacular launch for the latest version of the Windows franchise, which Microsoft is banking on to fight off incursions into the PC arena by touch-friendly devices such as Apple Inc's iPad.

"The sense is that until Windows 8 is fully installed and prices start to come down, we will be in this state of negative dynamics in the PC market," said Aaron Rakers, an analyst at Stifel, Nicolaus & Co.

Still, analysts warn against counting out Windows 8 — the most radical change in the operating system in 20 years — as consumers grow more comfortable with its tile-based interface and touch features.

In the past, a new operating system from Microsoft tended to stimulate a spurt of PC sales, but PC makers simply did not get enough attractive machines into the market, said IDC.

"Lost in the shuffle to promote a touch-centric PC, vendors have not forcefully stressed other features that promote a more secure, reliable and efficient user experience," said Jay Chou, senior research analyst at IDC.

This year could be better, he suggested, even in the face of talk about the death of the PC as tablets are on track to outsell full-featured machines for the first time in the United States.

"As Windows 8 matures, and other corresponding variables such as ultrabook pricing continue to drop, hopefully the PC market can see a reset in both messaging and demand in 2013," said Chou.

PC makers sold 89.8 million units worldwide in the fourth quarter of last year, down 6.4 percent from the same quarter of 2011. That was slightly worse than expected by most, and the worst performance for more than five years, when the global economy shuddered to a halt and ushered in the worst recession since World War II.

For all of 2012, 352 million PCs were sold, down 3.2 percent from 2011. That was the first annual decline since 2001, according to IDC, in the wake of the tech stock crash and the September 11 attacks.

IDC is forecasting a meager 2.8 percent growth in PC sales for 2013.

"There's a lack of compelling reasons to upgrade," said Ashok Kumar, an analyst At Maxim Group, who said people are now waiting up to 10 years to replace computers rather than five in the past.

"Increases in performance have been smaller and there are fewer new applications that require more computing horsepower," he said. "In developing markets, the first purchase is not a PC, it's a smartphone, especially in markets where literacy levels are low."

No miracles at CES

The numbers are bad news for Microsoft, which still provides the underlying software for nine out of 10 PCs but is suffering as Apple's iPad and other tablets eat away at the cheap end of the PC market.

Touch-friendly Windows 8 and Microsoft's own Surface tablet were designed to counter that shift, but the radical new-look software has not gripped consumers' imaginations.

"Windows 8 wasn't going to be as big a catalyst," said Shaw Wu, analyst at Sterne Agee. "It's so different, it's almost uncomfortably different from past Windows, and there's a risk that Windows 8 ends up like Vista."

Windows Vista, released worldwide in 2007, was Microsoft's least popular operating system with users in recent years.

Microsoft pulled out of the Consumer Electronics Show in Las Vegas this year, vacating its usual sprawling display area, but PC makers such as Asustek, LG Electronics and Samsung Electronics filled the gap with a dizzying array of big screen computers, lightweight laptops, tablets and combinations of those, all running Windows 8.

Many of the new models attracted jostling crowds on the show floor, like Panasonic Corp's 20-inch ultra-high-definition tablet and Razer's dedicated Edge tablet for PC gamers.

But none was hailed a show-stopper that might single-handedly turn around the fortunes of Windows.

"No single device will spur sales, it will take time for consumers to learn that Windows 8 even exists. CES will do little to change that," said Sarah Rotman Epps, an analyst for tech research firm Forrester. "Windows 8 is going to be a slow ramp, regardless of hardware quality."

Microsoft says it feels good about the progress of Windows 8, as sales hit 60 million this week after 10 weeks on the market. That is in line with Windows 7 three years ago, and well ahead of Vista, which took 100 days to reach 40 million sales.

Tami Reller, chief financial officer of Microsoft's Windows unit, said sales of Windows 8 PCs may have been held back by shortages of the most popular touch-screen machines.

"The level of demand I think surprised a lot of people. And frankly, the supply was too short," said Reller at an analyst presentation at CES this week.

Hopes for Surface with Windows 8 Pro

Microsoft is looking to juice that demand further this month with its new Surface with Windows 8 Pro, a tablet running an Intel processor that is fully compatible with Office and traditional PC programs, unlike the first Surface it launched last year based on an ARM Holdings-designed chip.

Despite that bullishness, analysts have been edging down their earnings expectations for Microsoft lately.

"Win 8 is disappointing, the PC market will remain weak for awhile and margins are likely capped," said Morgan Stanley analyst Adam Holt on Thursday, as he downgraded the stock to 'equal-weight' from 'overweight'.

Investors are also nonplussed, driving Microsoft's shares down neraly 20 percent since last March, even as the Standard & Poor's 500 has marched upward to a five-year high this week. The shares are down 6 percent since the launch of Windows 8 on October 26.

(Additional reporting by Poornima Gupta, Miyoung Kim, Timothy Kelly, Sinead Carew and Noel Randewich in Las Vegas, and Alistair Barr and Alexei Oreskovic in San Francisco.; Editing by Gary Hill and Steve Orlofsky) 

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This story was updated at 10:25 p.m. ET.