Microsoft Can’t Keep Up in a Mobile World

Updated April 11, 2013, 3:05 p.m. ET

Microsoft Can’t Keep Up in a Mobile World

By ROLFE WINKLER

The PC ecosystem is under threat. To rescue it, Microsoft MSFT -0.50% and IntelINTC -0.69% may have to dig deeper—into their own pockets.

Global personal-computer shipments fell 14% in the first quarter, according to research firm IDC, their steepest decline ever. Microsoft’s stock duly fell 5% on Thursday, with Hewlett-Packard‘s HPQ +0.10% stock down 7% and Intel’s, 3%.

What is surprising is that investors are surprised. Not only did the two halves of the “Wintel” duopoly miss the boat with mobile, their latest attempt to regain momentum has looked ineffectual for months. New machines running Microsoft’s latest touch-enabled operating system, Windows 8, typically powered with Intel chips, are so rare as to elicit stares when seen in the wild.Microsoft blames limited distribution. But IDC analyst Bob O’Donnell points out that such machines have proven too confusing and expensive. For example, he says, expecting every Windows 8 machine to be touch-enabled, some consumers think the nontouch versions are broken when they encounter them in stores. Meanwhile, they want to be charged the same for the touch versions as for conventional PCs, but expensive touch panels increase the cost.

There is hope that PCs will get a boost in the second half of the year, especially from business customers since Microsoft is ending support for Windows XP in 2014. As XP users upgrade to Windows 7, a rising tide should lift Intel’s boat temporarily, along with business-focused PC makers likeDell DELL +0.39% and Lenovo 0992.HK -6.06% . But that tide should recede as few businesses are likely to then make the jump to Windows 8. The benefits of putting touch-enabled PCs on workers’ desks are unclear.

Emerging markets are another pillar of hope for PC-demand growth. Intel claims that once the average number of weeks of household income needed to buy a PC in a particular country falls below eight, PC penetration tends to take off. China, for instance, passed that threshold a few years ago. Yet the implied boost from China isn’t showing up: IDC’s data show PC shipments in the Asian-Pacific region excluding Japan dropped 12.7% in the first quarter, the same as in the U.S.

Mobile devices are the likely culprits. Some newly affluent emerging-market consumers may be skipping over PCs altogether and going straight to mobile devices, says Bernstein analyst Stacy Rasgon. Meanwhile, developed-market consumers spending more time and money on tablets and smartphones likely don’t feel the need to upgrade their PCs as frequently.

If Microsoft and Intel don’t take more drastic measures soon, they risk a downward spiral for the Wintel ecosystem. Popular devices encourage software development, which attracts more users and then more developers and so on in a virtuous circle. PCs may never have been sexy, but they have always offered compatible software across different makes.

As PC sales dwindle, developers will devote more of their energy to writing software for devices gaining in popularity. Right now, these are the ones running Apple‘sAAPL -1.04% and Google‘s GOOG -0.04% mobile operating systems and using chip technology powered by Intel rival ARM Holdings ARM.LN -0.39% .

If all the best mobile software is being written for Apple and Google devices, then increasing distribution and bringing prices in line with conventional PCs, and even a seven-inch version of the Surface tablet that Microsoft is planning, may not be enough to arrest the slide.

The other way to tempt consumers is with much lower prices for Windows 8 devices. But doing this would ultimately mean Microsoft and Intel accepting lower profits. Everyone else in PC-land has seen margins squeezed relentlessly. To preserve the entire ecosystem, it may be Wintel’s turn.