Obsolete operating systems are pushing the PC industry into its biggest upgrade cycle since the Millennium Bug bonanza, but in the longer term the industry's model for continued growth is itself just about obsolete, according to analysts.

Worldwide, PC makers will ship 186.4 million units this year, up 13.6 percent from last year, according to the latest projections from Gartner. Out of those shipments more than half - nearly 100 million - will be replacements, and next year the replacement shipments will hit 120 million, Gartner said. Replacement shipments this year and next year will surpass the record replacement numbers seen in 1998 and 1999, as companies rushed to dump systems that might be vulnerable to the Millennium Bug, Gartner said.

The optimistic figures are based on shipments so far this year, according to the research firm. George Shiffler, principal analyst for Gartner's client platforms research, said a major factor in driving replacements isn't the need for better performance or a desire for new features, but the expiration of Microsoft technical support for older operating systems. "More than 30 percent of installed PCs are now at least three years old," Shiffler said. "Many, if not most of these PCs, are using older Windows operating systems that are no longer supported or are about to lose full technical support."

Traditionally, the PC industry has relied upon upgrades every three or four years from businesses, which buy two-thirds of all PCs sold annually. That cycle is now on its way out, because of market saturation and, ironically, the fact that businesses are happy with what they have, according to analysts.

Longhorn and the Maginot line
Aside from obsolete technical support, there are few reasons to replace old PCs, Gartner said. Shiffler argued a new upgrade cycle won't begin until 2008, when Longhorn - the code-name for Windows XP's successor - becomes mainstream. In the meantime, Microsoft's only announced product is XP Service Pack 2, which will largely consist of improvements in security and patch management, along with a possible "refresh" of XP known as XP Reloaded. "The next really exciting wave of architecture is Longhorn," said RedMonk analyst James Governor.

But as far as businesses are concerned, Longhorn is less a product than a term used to describe Microsoft's technology plans. "For enterprises it's too early to plan around Longhorn. It will not be a reality for enterprise deployment for some time - and nobody adopts the first release of an operating system anyway," he said.

New security capabilities - now Microsoft's biggest priority - could drive upgrades, but here the problem could be convincing buyers that new systems such as Longhorn really will improve safety. "There is no assurance that the new environment will be any more secure than the existing ones, despite how it's advertised," said IDC analyst Roger Kay. "Security is a weakest link problem, and no matter how intimidating the facade of the Maginot line, the Panzers can still sweep around them."

At its recent WinHEC hardware conference Microsoft convinced some that 64-bit computing will soon be a reality on the desktop, which could change the upgrade game, industry observers said. However, the real problem is that businesses don't want to be tied to a regular upgrade cycle, according to analysts, and that means the PC industry will have to find new ways to maintain its growth.

Microsoft, for example, is shifting away from the traditional model with schemes such as the controversial Software Assurance plan, which champions a subscription-style model. "Microsoft is moving from the old upgrade cycle to promoting all their products as a coherent whole," said IDC group consultant Chris Ingle. "They are pushing more server products and subscription products."

The battle for Middle Ware
IBM is attempting to change the game with an emphasis on middleware, which would allow users to access the same data whether on a PC or on a mobile device - a move which incidentally could erode Microsoft's traditional desktop software stronghold. Red Hat is also pushing a different view of the desktop with its new desktop Linux software, available only as an enterprise service.

"The PC is now a mature market, and companies are going to go looking elsewhere," said Shiffler. Gartner said in the longer term the industry will see steady growth in the high single-digits, down substantially from the double-digit growth upon which the industry was built.

Gartner sees the PC business continuing to look much as it has done, but on a longer upgrade cycle - perhaps four years rather than three - and minus the boost given by new market penetration. As a result companies are having to make radical shifts in their business models, putting the emphasis on an efficient supply chain and on maintaining the installed base, Shiffler said: "Companies are still adjusting to what's going on."

Linux vendors such as Red Hat have said they hope to capitalise on the opportunity presented by the current replacement boom. "Now, with a major hardware refresh cycle underway, this is a great opportunity," said Red Hat president and CEO Matthew Szulik in a recent interview.

But getting Microsoft customers to switch to Linux desktops will be like squeezing blood from a stone, Shiffler said. "Linux may be right for select markets, but not generally," he said; barriers include competing with Microsoft's huge library of applications.

Customers may make a great show of studying Linux's cost benefits over Windows, but this is mostly in order to get a better deal from Microsoft, Shiffler argued. "People are definitely disgruntled over the prices Microsoft is charging, but I'm not sure Linux is the answer to that," he said.