Microsoft Bets the Ranch on Windows Vista: But Could Vista Be More Significant Than Most Believe?

On Tuesday 30 January 2007, Microsoft chairman and chief software architect Bill Gates will spend his day in New York at what many have called the world's last OS launch. It means a lot to Gates who goes out to pasture in 2008, and even more to Microsoft.

For a peek at what Vista can do, check this out.

The nation's consumer electronics retailers will start selling at 12:01 AM to capture latent demand for eager upgraders, despite a dearth of Ultimate systems bearing the hefty $400 price tag. In fact, Ultimate has been postulated as a major hole in the strategy. But the company's competitors are scared enough to claim Vista violates the terms of anti-trust settlements it has agreed to.

Most analysts, on the other hand, have said there is no compelling reason to upgrade; even worse for Redmond, some have even called it the biggest opportunity Apple has to take share with Mac OSX in a decade. And, the few supporters out there have mostly pointed to the revolutionary interface as among the chief reasons to migrate.

I think this otherwise healthy skepticism has been overstated in the wake of the iPhone reality distortion field. And, despite being tempted from time to time to consider a Mac, in recent rundowns I've seen, the real impact of Vista will not be on upgraded PCs but on new ones, probably those running the "Ultimate" and "Home Premium" edition of the consumer package.

While the justification of how Windows Vista isn't worthy of upgrading your existing PC, the arguments have largely focused on Windows XP as simply still-good-enough (not-obsolete-enough-yet), the biggest impact of Vista will be on new PCs, particularly entertainment oriented convertible notebooks with touchscreens that enable portable, powerful communications. And, despite four flavors of the OS that have even confused me, I believe the release will drive a new upgrade cycle in months to come.

Plus, for the first time since Apple launched, er... "announced" the iPhone earlier this month, I am beset by gadget lust unlike anything I've seen lately.

The object of that desire is the exquisite-looking HP tx1000 notebook (see that link for a two-minute video on this sweet box).

I'd actually decided to skip the notebook upgrade cycle this time around, but an even cursory examination of the features from CNET's review reveal a worthy entry by the resurgent HP into a space Dell is largely absent from (for the moment).

And that certainly doesn't mean Microsoft's competitors have been silent. In fact, the trade group organized to battle them in Europe took advantage of the hype cycle to get some ink of their own:

Today, ECIS (European Committee for Interoperable Systems) again charged that Windows Vista would stifle innovation and competition. The group, founded in 1989, represents a Who's Who list of Microsoft competitors, including Adobe, Corel, IBM, Linspire, Nokia, Opera, Oracle, RealNetworks, Red Hat and Sun. Many of these same companies are Microsoft partners, too.

Back in November, I predicted about Office 2007 and Windows Vista: "Competitors aren't done complaining to European regulators about either product. Their clamoring will continue and maybe even increase ahead of Windows Vista's consumer launch in January."

Clamoring has increased, although the timing is surprising. It's not like the European Union's Competition Commission is going to suddenly ban Vista, over the weekend, ahead of Tuesday's widespread availability. Heck, it took the European Commission almost five years to decide Microsoft was guilty of anything.

ECIS has filed a complaint in Europe, but that was in February 2006.

The good folks at ECIS are just looking for some good press ahead of the Vista consumer launch, the same as the BadVista.org group, which plans "actions" during Monday's launch festivities. Microsoft's own PR noise will be loud come Monday, so typically slow news day Friday is good timing for ECIS. Besides, there are lots of news organizations looking for a fresh take on Windows Vista, since it has been covered ad nauseam. Today's Vista attack is that fresh view, er, vista. Or maybe it's ECIS' answer to Microsoft Chairman Bill Gates' call for people to share their "Wow moment."

Microsoft's position is most tenuous before a new operating system ships, particularly in this era of trustbuster oversight. But not right before the operating system ships. In October, Microsoft agreed to make some Windows Vista changes, in an effort to stave off any problems with the European Commission. Those changes came before Microsoft completed Windows Vista's gold code in early November and made it available to businesses the last day of that month. Windows Vista is now a train near its destination--and it's got a lot of momentum. Microsoft won't be stopping that train and asking the passengers to get off.

If ECIS were truly serious, it would have launched a more concerted effort much earlier than the Friday before Tuesday's general Vista availability. That said, ECIS' timing doesn't invalidate its complaints.

Microsoft and the European Commission have had an ongoing dispute over the release of protocol information that trustbusters contend would foster competition in the market for workgroup servers. In its 2003 adverse antitrust ruling, the European Commission concluded that Microsoft used its dominance on the desktop to gain unfair competitive advantage in the workgroup server market. If European trustbusters are correct, than stalling protocol disclosure works to Microsoft's advantage, because the company would continue to gain server market share. At some critical juncture, market share reaches a level where corrective measures are ineffective.

For its part, Microsoft has argued that protocol disclosure, at least the way the European Commission wants it, would violate the company's patents and copyrights.

In a press release issued today, ECIS argued that XAML (Extensible Application Markup Language) is "positioned to replace HTML" and "is designed from the ground up to be dependent on Windows, and thus is not cross-platform by nature." Considering the low XAML adoption, it's hard to justify such a claim. However, characteristic of monopoly abuse is the leveraging of a dominant product in one market to gain control of another. Bundling, which is a longstanding Microsoft tactic, is a typical means of leveraging dominance. This practice and its impact on adjacent markets is one reason the European Commission ordered Microsoft to ship versions of Windows without the bundled media player.

ECIS views the XAML and OOXML (Office Open XML) file formats as a double whammy to fair and open competition. ECIS backs ODF (OpenDocument format), which received ISO international standards approval in May 2006. OOXML is in the early ISO-ratification process.

"With XAML and OOXML Microsoft seeks to impose its own Windows-dependent standards and displace existing open cross-platform standards which have wide industry acceptance, permit open competition and promote competition-driven innovation," Thomas Vinje, ECIS counsel, said in a statement. "The end result will be the continued absence of any real consumer choice, years of waiting for Microsoft to improve--or even debug--its monopoly products, and of course high prices."

ECIS raises some apparently legitimate concerns that have yet to be formally legitimized by European trustbusters. Microsoft took today's ECIS press release so seriously that it chose to reissue its February 2006 statement about the trade group's complaint.

"We have come to expect that as we introduce new products that benefit consumers, particularly with the kind of breakthrough technologies in Office 12 and Windows Vista, a few competitors will complain," Microsoft said in the statement. "ECIS is a front for IBM and a few other competitors who constantly seek to use the regulatory process to their business advantage. When faced with innovation, they choose litigation. We have received the complaint from the Commission and will respond in due course."

Hiss, Me-OW! So, what's on the agenda for tomorrow?

Bill Gates and guests by the hundreds will be in New York on Jan. 29 for an all-day consumer product launch. Ceremonies start in the morning on Manhattan's West Side with a "human billboard," followed by an invitation-only lunch hosted by CEO Steve Ballmer. The main event: a 5-1/2-hour extravaganza at the Nokia Theatre in Times Square, which seats 2,000 people and features an 85-foot, high-def LCD screen on its marquee.

Vista doesn't formally go on sale until Jan. 30. Between the launch event Monday and product release Tuesday, Gates will appear on The Daily Show With Jon Stewart. All of this for a PC operating system some critics say isn't that different from Windows XP.

IT professionals can ignore the fuss; Microsoft released Vista to them two months ago. Vista, of course, is arriving later than expected. In reporting last week that second-quarter profit fell 28% on 6% higher revenue, Microsoft said it had to defer $1.64 billion in revenue because of the delayed rollout of Vista and the new version of Office.

The big question: Will consumers run out to buy Vista? Retailers will be open at midnight just in case. On Tuesday, Ballmer will be at Best Buy on Fifth Avenue doing what he does best--hawking Microsoft's newest software releases.

So what's the big deal?

After more than five years of development, over 50 million lines of software code, a $6 billion investment and a few headaches, Microsoft Corp.'s Windows Vista finally reaches consumers this week.

But the extent of success of the new operating system may depend more on large corporations, looking for different things than the multimedia bells and whistles aimed at home users and who have more discretion about when to buy the software.

Computers running Vista go on sale at retailers on Tuesday, two months after Microsoft made it available to corporate, or enterprise, customers. This is the first major upgrade of the Windows operating system since Microsoft first released Windows XP in October 2001.

Vista -- the upgrade to the Windows operating system that runs on more than 90 percent of the world's computers -- is almost certain to be a product success, and consumers have little choice but to buy Vista since nearly three-quarters of new computers sold this year will come preloaded with it.

By contrast, corporations can load older operating systems, or even non-Microsoft systems such as Linux, so the rate of corporate adoption of Vista may largely determine how fast and large a return Microsoft will see on investments for Windows Vista and its other new products, Office 2007 and Exchange e-mail server software.

Many corporate information technology executives are taking their time, as they often do for major software changes.

"If I was an IT manager and I valued my job, I wouldn't move to Vista or migrate my people to Vista for 12 months. I'd sit and wait," said Andy Walker, a technology columnist and author of an upcoming help book on Windows Vista.

The Windows operating system is Microsoft's cash cow. It accounts for 30 percent of the company's $44 billion in sales, 60 percent of its operating profit and provides a steady stream of cash flow that allows Microsoft to venture out into new businesses like digital music players and game machines.

Research firm Gartner estimates that Windows Vista will be running on more than half of the world's consumer PCs by late 2008, but it won't be the dominant operating system for corporate computers until 2010.

"The enterprise and consumer adoption curves are very different," said Gartner analyst Michael Silver.

Industry watchers say corporate technology departments will carefully test Vista to see how it handles applications unique to their organization. In the meantime, when companies upgrade to computers preloaded with Vista, they will often remove the new operating system for an older version such as Windows XP.

Companies often hold back about a year until the release of a version that fixes initial problems.

"Adopting a new Microsoft system in the first six months is being on the bleeding edge of technology," said Keith McCall, chief technical officer at Azaleos, a service provider for Microsoft Exchange and a former executive at Microsoft.

But in the three months ended December, the number of business customers renewing software agreements or signing new contracts exceeded the company's forecasts, Microsoft said.

"In terms of people who have renewed their enterprise agreements or signed new ones, it's been very good," Microsoft Chief Financial Officer Chris Liddell said in an interview last week. "That makes us feel good about the intention to deploy."

BEEFED-UP SECURITY

A key to the corporate success of Windows Vista will likely be better security, analysts said. New account controls make it difficult for users to make changes that could unintentionally threaten a computer's stability or security.

Another technology called BitLocker encrypts a computer's hard drive and protects data and information if a computer gets stolen or lost. As more workers travel with notebook computers that carry sensitive information, BitLocker is seen as a valuable extra layer of protection.

Many analysts and reviewers agree that Windows Vista is a marked improvement over its predecessors in terms of stability, security and productivity and those benefits alone could drive corporate customers to upgrade.

"No matter how you look at it from a corporation's point of view, it's a better product. We think there is much more incentive to switch much faster," said Ben Bar-Haim, vice president of software at Advanced Micro Devices Inc.

AMD, the No. 2 maker of computer processors, is expected to be a beneficiary of the upgrade to Vista since most consumers will have to buy new computers specifically to run the operating system.

Only 15 percent of today's computers are capable of running Windows Vista Home Premium, considered to be the mainstream consumer version, according to Gartner. That is just one reason why people probably won't be lining up outside stores to buy Windows Vista out of the box on the first day of release.

In addition, the growing complexity of upgrades and general satisfaction with existing operating systems could result in a Vista launch that lacks the fanfare of previous Windows releases. A decade ago, people lined up outside stores to get a copy of Windows 95.

"You're not going to have people waiting around the block for CompUSA to open like they did 12 years ago," said Gartner's Silver. "However, Vista can still be successful even if people aren't lined up around the block."

USAToday has a good rundown of the bet the ranch impact this will mean for Microsoft:

When Microsoft says Windows Vista is its most important product announcement in years, it isn't just feeding the hype machine.

The new operating system, to be made available to consumers Tuesday, will register a seismic impact on the software giant's bottom line and underscore Microsoft's future vision of computing for millions of consumers worldwide. Just ask Microsoft Chairman Bill Gates.

"Vista is the biggest thing for us in years," Gates said in a telephone interview. "It is at the core of everything we do."

Vista is the hub of Microsoft's unfolding "connected experiences" strategy, a treatise on how consumer-electronics gadgets - be they TVs, game consoles or music players - connect and their content is delivered to PCs and cellphones. The convergence of digital devices has dominated recent Gates speeches, including his keynote address at the massive Consumer Electronics Show in Las Vegas this month.

On Monday, Microsoft has scheduled a day-long marketing blitz in New York for Vista amid a multimillion-dollar global TV and print campaign. Gates and Microsoft CEO Steve Ballmer are scheduled to attend.

Microsoft is putting its money where its mouse is: As the latest iteration of Windows, Vista has the dual role of being both the future cash cow of Microsoft and a centerpiece of its next generation of products and services.

Windows and Office, a suite of productivity software, are the software maker's most profitable product lines, accounting for about half its $12.5 billion in second-quarter revenue. But they are also among its oldest: Neither has been overhauled in years. If Microsoft is to preserve its high-tech golden geese, it must persuade the hundreds of millions of current Windows and Office users worldwide to switch, software analysts say. (The 2007 edition of Office - also launching for consumers now - boasts a new interface that showcases relevant features of Word and Excel when PC users are performing tasks.)

"Not only is the company's reputation staked on this high-profile event, but its profitability, as well," says Roger Kay, president of Endpoint Technologies Associates. "Despite all the new and growing product lines, nothing can replace Windows and Office yet, and maybe ever, in the profit department."

Still, Microsoft is hedging its bets. Vista's consumer debut comes as Microsoft enters what some analysts consider the greatest upheaval in its 32-year history. The emergence of new business models - such as advertising-supported Web services and inexpensive "open source" software - threaten Microsoft's core business, making it imperative for it to cultivate new growth markets in the Web 2.0 era.

Software applications are being developed at warp speed and distributed over the Internet within weeks. Contrast that with the painstaking process of Vista: It took Microsoft five years and some 10,000 workers to create. That qualifies Vista as something of an anachronism, and a last vestige of the Microsoft Way.

Ballmer has said as much. The complex, time-consuming process of crafting computer code, which prompted repeated delays of Vista, is a thing of the past, he has said.

Microsoft's change in approach has been reflected in its product road map and anticipated revenue. While nearly all Microsoft's profits are from older products, Zune, its new portable music player, and the Xbox gaming console are starting to carve out significant niches. Xbox should see $4.6 billion in sales in the fiscal year ending in June, Goldman Sachs estimates. Zune sales will top $250 million in the same period, Goldman says.

For the fiscal year, Microsoft expects to ship 1 million units of Zune, which made its debut in mid-November. About 10.4 million Xboxes have shipped since its November 2005 launch.

"Microsoft is in the process of transforming itself from a company narrowly dependent on a few highly profitable - and near monopoly - products to a broadly diversified software, services and even hardware company," Kay says.

Says Charles King, an analyst at researcher Pund-IT: "Microsoft is at a crossroads."

For now, however, the future is the past (of sorts) for Microsoft. It predicts Vista will be accepted faster than any other Windows OS: It expects to sell 200 million copies to consumers and businesses worldwide in its first two years. (Vista was made available to corporate customers in November.) Windows XP, Vista's predecessor, sold 120 million copies in its first 24 months, market researcher IDC says.

Market researchers also expect the new operating system to be Microsoft's fastest-selling yet. By 2008, more than half of all PCs shipped worldwide will run on Vista for corporate customers. Additionally, 30% of all PCs shipped worldwide will be Vista machines for consumers, according to market researcher Gartner.

Most consumers are expected to buy a new PC loaded with Vista, though many with newer machines can upgrade from a previous version of Windows.

"Vista serves as a hub allowing people to stay connected to their personal lives while at work, and vice versa," says Eric Hollreiser, director of corporate communications for Microsoft's consumer efforts. "There is no company better positioned to provide those connections." To underscore its point, Microsoft says it has products and services in 420 million households worldwide, touching more than 1 billion consumers each month.

A new laptop with all the features of Vista can cost as much as $3,000, which could scare off budget-minded consumers in the next 12 to 18 months, King says.

Windows is rapidly becoming one of the most expensive components in a PC, after the display, says Ted Schadler, principal analyst at Forrester Research.

But it is an investment Microsoft and its PC partners believe many consumers will make. To ease the concerns of those hesitant to update their PCs to Vista, Microsoft says Vista will be available on a wide range of new PCs and laptops from Hewlett-Packard, Toshiba, Sony Vaio and Medion designed to take advantage of Vista's sparkling graphics, more robust security and better photo-organizing abilities.

The PC deluge underscores the importance of Vista and the continued dominance of Windows as the operating system of choice for the next several years, software analysts say.

Gates emphasizes that Vista will succeed in Europe, Asia and South America - just as it will in North America, where it has a vise-like hold on the consumer and business markets. "We don't expect to see any variation at all" among markets, Gates says. Localized versions of Vista in German, Japanese and more than a dozen other languages are coming out at the same time as the English version, Microsoft says.

Analyst Kay says the European Union, which has squabbled with Microsoft over antitrust issues, is staying out of the way of the Vista launch for now. "The coast is more or less clear," Kay says.

So far, Vista has scored with business users. Sales since its Nov. 30 debut are stronger than expected, according to a report from NPD Group. Sales in the value-added reseller market for Vista in December were 63% higher than those of Windows 2000 in March 2000, its first full month on the market. Vista's sales were 4% below those of Windows XP in November 2001, its first month available.

"Vista is off to a good start, considering there has been little in the way of promotion," says NPD analyst Chris Swenson.

There are lofty expectations for Vista, which suggests a shelf life of at least five years. The PC is and continues to be a powerful general-purpose tool for most consumers. But as PC users, especially younger ones, gravitate to mobile devices, Microsoft needs to roll with the changes, software analysts say.

"Microsoft markets have evolved dramatically since the launch of Windows XP," says Schadler. "Macintoshes, set-top boxes and closed-system consumer electronics all use non-Windows operating systems. That means that Windows is not the default choice for non-PC devices."

Still, there are more versions of the Windows OS on the horizon - especially, Gates says, as the functions of different digital devices merge. "Absolutely. We plan major upgrades over the next decade to take advantage of speech and vision capabilities as they evolve," Gates said. "And we will constantly improve security."

That will be a task largely left up to Ballmer; Ray Ozzie, Microsoft's chief software architect; and Craig Mundie, chief research and strategy officer.

By mid-2008, Gates says, he will shift his responsibilities from "fitting all of Microsoft's technology pieces together" and concentrate more on philanthropy.

"I will be advised by Steve on what to focus on then," Gates said. "I think my expertise and interest will lean toward tablet technology. But that's his call."

The development of Xbox exemplifies how far Microsoft has come in diversifying beyond Windows and reshaping its culture. A seminal moment came in 2000, when J Allard, a vice president in Microsoft's Entertainment and Devices Division, insisted the new Xbox video game console be developed without using Windows. Despite misgivings, Gates & Co. essentially relented.

Steven Sinofsky, longtime head of the Office unit, is in charge of accelerating the Windows product cycle. Ozzie, a computing industry icon, is developing Web-like functions for many Microsoft products.

"Clearly, we see lots of innovation coming rapidly from the company now," Microsoft's Hollreiser says. "Expect continual innovation with Xbox, Zune, Vista and our other products in real time," he says. "That's how we do business now."

Whatever happens Tuesday, Microsoft has made the right bets and I believe the innovation - yes, innovation - inherent in Windows Vista will energize Microsoft for years to come and, perhaps enable the company to respond to the Web 2.0 / SaaS evolution that has emerged in recent years with competitors ranging from Google to OpenOffice.org. Here's a picture of the "ultimate" financial impact:

Microsoft's decision to offer higher-end editions of Windows Vista could pay off in 2007 with millions more in its pocket, a financial analyst said Friday.

Although criticized by some users and pundits for their higher cost, the premium versions of Vista -- particularly Ultimate ($399 for full version, $259 for upgrade) but also Home Premium ($239/$159) -- could add hundreds of millions to Microsoft's bottom line this year.

"We believe upside to our 2007 client revenue estimate could come from a higher premium mix, and a bigger contribution of Vista Ultimate to the premium mix," said David Hilal, an analyst with Friedman, Billings, Ramsey & Co., in a research note to clients.

Hilal's optimism was due to Microsoft's revamped estimate of the Windows mix it expects to sell during the rest of fiscal 2007. In a conference call Thursday to announce second-quarter earnings, Microsoft CFO Chris Liddell revised the estimate of premium editions' share upward to 60% of all sales from an earlier forecast of 54%.

In fact, during the quarter that ended Dec. 31, the premium mix was at 67%, an increase of 18 percentage points over the year prior and eight points over the first quarter. The uptick, said Microsoft, came from a boost in purchases of Windows XP Media Center, which in turn was driven by the promise of free upgrades to Windows Vista Home Premium for Media Center users when Vista rolls out to consumers next week.

Vista's premium editions look like a good bet, said Hilal. "Due to the increasing demand for multimedia functionality, we believe that Ultimate could do better than our 1% OEM license mix expectation, as consumers that use their home PCs for both entertainment and business purposes will be attracted to the breadth of functions that Ultimate offers," he wrote in the research note.

For every 1% increase in Ultimate's share of the premium mix, Microsoft will gain $150 million in revenue, Hilal estimated. Likewise, for every point increase in Home Premium's share -- which he forecast as nine percent -- Microsoft gets an additional $50 million.

"Our thesis remains intact: we believe Microsoft is embarking on a multiyear, multiproduct cycle that will drive improved revenue growth and expanding margins," Hilal concluded in the note.

Windows Vista will be available Jan. 30 in four retail SKUs (stock-keeping unit): Home Basic, Home Premium, Business, and Ultimate. Full version prices range from $199 for Basic to $399 for Ultimate, while upgrade prices start at $99 for Basic and top out at $259 for Ultimate.