TROUBLE ON THE RETAIL FRONT.

December is ordinarily a blowout month for retail PC sales. But this year something went wrong: According to PC Data, the leading channel research firm, retail and mail-order PC sales in December actually fell by an eye-opening 24% over the previous December.

For an industry that takes 20%-30% growth rates for granted, the PC Data numbers raised some troubling qissues. Despite its inefficiencies, the retail channel is still one of the few ways to reach consumer and small business software buyers. Even for high-end software developers whose products never appear on retail shelves, moreover, the availability of cheap, frequently-upgraded hardware has always been a critical economic factor. If the retail market implodes, the ripple effects are bound to be painful for the whole software world.

What's happening to retail sales? We checked in with PC Data research director Roger Lanctot for some answers:

Roger, did the December decline come as a surprise?

"Actually, we saw our first ever year-to-year decline in August, and the negative comparisons got progressively worse in consecutive months. For the whole year, retail PC sales were off by almost 1%. This, too, was a first."

Any idea what's behind the decline?

"It's probably a combination of issues. Household penetration of PCs is now up to 60%, so there aren't as many new buyers left. Average prices have flattened, or have even gone up slightly, and with only three major brands left in the retail market, there's been a lack of competition. Finally, the only dominant promotional campaign was a $400 ISP rebate that only makes sense for first-time buyers."

Usually, PC sales pick up whenever Microsoft releases a new version of Windows. But Windows Me seems to have had almost no impact.

"Windows Me probably caused more harm than good. It was undermarketed and it's had mixed reviews. While Windows Me forced software publishers to rewrite their drivers and upgrade their applications--particularly antivirus software--many of the performance enhancements already existed in Windows 98 SE. Worse, there's been an industry-wide buzz around anecdotal reports of Windows Me conflicts and crashes."

If PC sales drop, that's obviously going to affect software sales--and in fact your data shows a lot of weakness in retail software last year, especially at year-end. Is this just a reflection of weak PC demand?

"There's also a pricing issue. Declining software sales seem to correlate directly with increased use of the Internet and widespread access to free information and software online. In addition, the retail industry is still in the process of weaning itself from the rebate- driven sales growth of 1999. This transition to 'everyday low prices' from steep rebating has been a painful process, though we may finally have a pricing foundation upon which to build future growth."

Is anything likely to bring technology consumers back to retail?

"I think so. PC sales should recover as manufacturers target lower price points and adjust their promotional messages. I expect software sales growth will stay in the single-digit range, but there should be some lift from mobile computer hardware and software, digital cameras, data storage drives and media, game software and hardware, and Internet-enabled software applications. This year we can also expect to see a rejuvenated Learning Company, Microsoft's new Whistler operating system, and an intense battle for dominance in PC games among Havas Interactive, Electronic Arts, Infogrames, Activision, Microsoft, Interplay, and Disney Interactive."

Roger Lanctot, senior director of research, PC Data, 12001 Sunrise Valley Dr., Reston, Va. 20191; 703/995-5916. E-mail: [e-mail].