What’s going on?

Market research firm IDC reported that PC shipments totaled 86.7 million units last quarter, down 0.1% from the year earlier period. This was far below IDC’s projection of 2.1% growth. Gartner also reported the decline in sales, counting approximately 87.5 million units. “It certainly seems that the industry as a whole is in a slump,” said Craig Stice, senior principal analyst for compute platforms at IHS iSuppli. “Bottom line is still the economic conditions worldwide.”

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Another factor in the slowdown of PC sales is the continued growth of do-more tablet computers and smartphones. Counting tablets as PCs actually causes Apple (AAPL) to dethrone Hewlett-Packard (HPQ) from the top PC vendor spot. Boosted by strong demand for its iPad tablet, Apple was the top PC seller worldwide according to the UK-based Canalys, which counts tablets 7-inches or larger as PCs. During the second quarter of 2012 Apple sold 17 million iPads and 4 million Macs.

Still, regardless of which company is considered the top vendor, the fact is that the outlook for the rest of the year is likely slowing demand for traditional PCs. Santa Clara, California-based Intel (INTC) cut its 2012 forecast, while rival Advanced Micro Devices Inc. (AMD) recently disclosed that its second quarter revenue slumped 11%. “The challenge now is that PC demand in the United States, Western Europe and the developed world is slowing down,” said Bob O’Donnell, vice president of clients and displays for IDC. “Who out there now needs a PC and doesn’t have one?” As a result the market is now focused on replacements, he added. A shaky economy, meanwhile, is convincing consumers they don’t really need an upgrade.

Are there any bright spots? O’Donnell’s answer: developing markets — but they still depends on underlying economic strength. “China’s economy is slowing down, and India is slower than people had hoped for,” he said. “Brazil is doing well, and will surpass the United States in shipments but that isn’t enough to keep the industry in good shape.”

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Meanwhile, highly touted Ultrabooks which received a lot of buzz at this year’s Consumer Electronics Show in January haven’t caught on with consumers. So-called Ultrabooks, thin and light yet powerful notebooks, were intended as the Windows PC industry’s answer to Apple’s hot-selling MacBook Air. But high prices may have slowed their momentum. “Ultrabooks didn’t sell at $999 and $899,” said O’Donnell.

The October arrival of Microsoft’s (MSFT) Windows 8 isn’t likely to help matters, especially as it will likely only add to the cost of a new computer. “People will hold off as Windows 8 is around the corner, but that could continue beyond October,” said Andrew Bartels, vice president and principal analyst at Forrester Research. “Past experience shows that corporate buyers and even consumers could take a wait and see attitude.”

One factor will be whether consumers can upgrade easily. While the most recent update from Windows Vista to Windows 7 was considered fairly smooth, it didn’t constitute a great technical leap. Past complex upgrades, notably to Windows 95, Windows XP and of course the notorious Windows Vista had many corporate and consumer users simply opting for a new computer. “We think Windows 8 does have the potential to drive sales when it is released in October,” said Stice. “Until then Windows 8 is creating that bubble effect leading up it.” That means slow sales throughout the rest of August and September.

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In the meantime, as Apple continues to dominate in the tablet space it could see some growth with its desktops and notebooks. Says Bartels, “So far Wintel vendors haven’t come up with an alternative.”