Strong PC replacement cycle expected in 2004

Ever since the economy began to stumble in mid-2000 and companies began trimming IT spending, industry watchers have wondered how long organizations would stretch the lives of their desktop hardware before beginning widescale upgrades.

That day may have come.

Based on recent semiconductor sales reports and anecdotal feedback from CIOs at several big US companies, this may be the banner year for desktop refreshment. During the economic downturn, many companies stretched the active lives of their PCs and laptops from a historical three-year average to four or even five years. But as desktop maintenance and support costs for older machines rise, many firms are taking advantage of an improving economy to upgrade to lower-cost, more robust machines.

"This maps exactly with our planning," said Tom Flanagan, CIO at MCI Communications Corp. in Ashburn, Virginia. The telecommunications company recently launched a yearlong plan to replace its roughly 55,000 laptops and desktops. Existing PCs were approaching five years old "and the cost to maintain them was becoming problematic," Flanagan said.

MCI isn't alone. Belgium-based DHL International Ltd. is planning to replace 5,000 desktops this year -- or just over half of its installed base, said Senior Vice President and CIO Steve J. Bandrowczak. Meanwhile, Hewitt Associates LLC, a Lincolnshire, Illinois-based human resources outsourcing and consulting firm, expects to replace as many as a third of its roughly 15,000 desktops this year as part of an upgrade to Windows XP, said CIO Perry Cliburn.

An industrywide PC replacement cycle "has already started, but the confirmation will come over the next 30 to 60 days," said Bill Zadrozny, CEO of Siemens Financial Services, a Bridgewater, New Jersey-based unit of the Munich, Germany-based electronics giant. Siemens Financial provides financing for hardware and software products made by Siemens AG and other manufacturers.

"Once you get past February, you'll see a strong order flow," Zadrozny said.

The Semiconductor Industry Association (SIA), a trade group in San Jose, predicts that worldwide semiconductor shipments should rise 14 percent this year. While demand for chips for mobile phones and automobiles will help drive that growth, those sectors represent just 12 percent and 8 percent of worldwide semiconductor consumption, respectively, while desktops represent 30 percent of the worldwide market, said Doug Andrey, a principal analyst at SIA.

While some firms have stretched the lives of their PCs over the past few years, other organizations have continued to upgrade portions of their desktop environments under more manageable, phased-in approaches. "It's not like companies stopped buying (desktops altogether); they just slowed their buying," says Steve Kleynhans, an analyst at Stamford, Connecticut-based Meta Group Inc. Kleynhans predicted that desktop purchases by large companies will rise between 5 percent and 8 percent this year.

Wyndham International Inc. is planning to replace 1,500 PCs this year while upgrading the operating system on an additional 1,000 machines by midyear as the Dallas-based hospitality company deploys Microsoft Corp. Active Directory, said Mark Hedley, senior vice president and chief technology officer. The replacements and upgrades, which represent about 40 percent of Wyndham's installed base, should generate "significant" maintenance cost savings for PCs "that have been in service beyond their life cycle, as well as the overall reduction in servers maintained by our technology professionals," said Hedley. He was referring to a planned reduction of its Exchange servers, from 63 to five.

This year, Reliant Pharmaceuticals LLC, a 3-year-old company in Liberty Corner, New Jersey, is planning to replace one-third of its desktops to coincide with warranty periods and reduce maintenance and support costs, said CIO Ronald Calderone. He expects to replace another third of the company's PCs in 2005.

Like Meta Group's Kleynhans, not everyone is convinced that commercial PC spending is going to spike this year. Compared with the boom years of 1998 and 1999, when many organizations were upgrading their PCs to help achieve Y2k-readiness, corporate desktop spending in 2004 "will be more of a balanced replacement cycle," said Alan Promisel, an analyst at Framingham-based IDC. Promisel predicted that unit shipments for PCs in the U.S. should rise 12.5 percent this year, compared with the 21.8 percent jump that occurred between 1998 and 1999. Said Promisel, "The costs to support these (older) systems is very high."

Another incentive for organizations to replace PCs and other equipment in 2004 is the Jobs and Growth Tax Relief Reconciliation Act of 2003, signed by President Bush last May. The act is aimed at creating new jobs and spurring economic growth in part through tax incentives for new equipment orders.

Before the law was signed, said the SIA's Andrey, a company buying a US$1,000 PC would have been able to write off roughly $200 in depreciation costs after the first year. Beginning next year, companies will be able to triple their first-year depreciation tax write-offs, giving organizations an incentive to buy new equipment this year.

While those considerations didn't ultimately factor into Burlington Northern Santa Fe Railway Co.'s plans to move apace with a "controlled and predictable" PC replacement program this year, the new tax laws did entice the Fort Worth, Texas-based transportation company "to spend heavier for locomotive replacements," said Jeffrey Campbell, the company's vice president of technology services.