Since Microsoft has launched Windows Vista, the company has been criticized many IT professional and Vista users. Although Microsoft executives disagree with the Vista naysayers, perception problems linger. Infoworld has an online petition urging Microsoft to keep XP in circulation. Dell is allowing professional customers to exercise their “downgrade rights” after June 30 when Microsoft will stop licensing XP to PC manufacturers. Downgrade rights, which come with Windows Vista Business and Windows Vista Ultimate, allow anyone with those software versions to downgrade to Windows XP Professional. Dell will install XP at its factories if customers choose. Other PC vendors have similar offers. Microsoft’s usual practice is to phase out an operating system as PC manufacturers and their customers move to the new one.
“Microsoft made a mistake with this one,” says Wharton management professor Lawrence Hrebiniak. “The company introduced something more complicated than XP and it requires more hardware.” Although Hrebiniak expects most Microsoft customers to move to Vista, he recently bought a new PC and decided to keep XP. “There is just a lack of enthusiasm for Vista among consumers,” he adds.
What’s unclear is whether Vista suffers from a perception problem that can be cured with better marketing or whether it faces more entrenched problems. In its fiscal third quarter ending March 31, Microsoft had client revenues (what the software giant calls its operating system sales) of $4 billion, down 24% from a year ago. After adjusting for a technology guarantee program that boosted revenues in the same quarter a year ago, client revenues were down 2%. In both cases, however, this figure fell short of estimates from Wall Street analysts.
Some of those analysts are beginning to worry. “The overall reputation problem that Vista has developed with both business and consumer users could be beginning to exert a material impact,” said Tsvetan Kintisheff, founder of Sofia, Bulgaria-based Kintisheff Research, in a research note.
Microsoft blames the client revenue figure on inventory issues with PC manufacturers and a jump in software piracy rates. CFO Christopher Liddell dismissed concerns about Vista and noted that the company has shipped 140 million licenses since the operating system’s launch. “There’s nothing in the third quarter that reflected a Vista-specific problem,” said Liddell on Microsoft’s earnings conference call.
According to Kendall Whitehouse, senior director for IT at Wharton, a larger issue facing Microsoft is the future of the operating system. “It may have just become too complicated,” he notes, adding that new technologies from Adobe and others allow software developers to create so-called “webtop” applications that only require a web browser or a cross-operating system runtime environment like Adobe’s AIR. Indeed, Google CEO Eric Schmidt declared at the company’s annual shareholder meeting on May 8 that “the shift from PC-centric to Internet-centric computing is the defining shift of our generation.” And Microsoft CEO Steve Ballmer has acknowledged that this shift was one of the primary reasons for Microsoft’s bid for Yahoo.
Meanwhile, another technology called “virtualization,” which allows multiple operating systems to run simultaneously on one PC or server, is diminishing the importance of products like Vista and raises questions about its future. “What is an operating system and what role should it serve?” asks Whitehouse. “The OS was originally intended as an abstraction layer between software applications and the computer’s hardware. But with the new abstraction layer between the hardware and the OS provided by virtualization and products like Adobe’s AIR that sit between the OS and desktop software applications, the role the operating system once played is becoming increasingly diminished.”
For its part, Microsoft has been hedging its bets with more web-aware software, including Windows Live Mesh, unveiled at the Web 2.0 Expo on April 22. Live Mesh combines Microsoft’s software and web services to allow various devices like PCs and smartphones to synchronize data with each other. Microsoft also recently introduced Silverlight, a web-based technology designed to deliver multimedia content and browser-based software applications. Silverlight will be used by NBC.com to deliver video from the summer Olympics in Beijing in August.
Despite these new developments, Microsoft finds itself at a crossroads, according to Werbach. “The platform for most uses of PCs today is the Internet, not Windows. Windows plays an important role in the ecosystem, but it’s not the center of the world in the way it used to be. Microsoft has made several attempts to integrate Windows and the web, but the center of gravity for innovation and monetization keeps moving to the network. Microsoft needs to decide whether it cares more about the next 5 to 10 years, or the 20 years after that.”
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