Big Business Starts to Sour on Vista

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SAGGING SALES

Alaska Airlines is one example. The carrier may soon get so many of its business applications over the Net that it doesn't need Vista or other high-powered software. The Seattle-based airline is now buying new Dell PCs that come with Vista. But it then downgrades to XP to avoid the hassles of the new operating system. "We don't get any competitive advantage out of what we run on the desktop," says Reeder.

The lack of urgency in upgrading to Vista is starting to show up in Microsoft's financial results. After two quarters of strong growth, revenues in the desktop Windows group, the company's most profitable, fell 2%, to $4.03 billion, during the fiscal third quarter ended Mar. 31.

Microsoft is insulated in some ways from dissatisfaction with Vista. About 80% of desktop Windows revenues come from sales to PC makers, which won't get any new copies of XP after June 30. In addition, many companies pay for Microsoft's products through multiyear licensing fees. So the revenues come rolling in no matter which version of software customers decide to use.

Still, getting Vista adopted is important for a number of reasons. It helps persuade corporate customers to add Windows to long-term agreements with Microsoft, and it leads companies to buy other products such as the latest Microsoft Office. Yet just 65% of Windows copies sold in the third quarter were Vista, while about 35% were XP. The company told analysts the Vista figure wasn't at the 80% level it wanted because of software piracy in China and other factors. "Everyone's still scratching their heads, asking, 'Is there something else going on?'" says Citigroup's Thill.

There's plenty afoot at Microsoft headquarters. Developers are working on the next version of Windows, and Ballmer has sworn the company won't have a five-year gap between releases like it did between XP and Vista. Meanwhile, Microsoft is offering more of its software over the Net. On Apr. 22 it unveiled Live Mesh, which lets users create an online version of their desktop computer so they can access personal files from any PC—and eventually from mobile phones and Macs. "Live Mesh represents the company Microsoft is trying to become," says Rob Enderle, president of consultant Enderle Group. "My hope is with Windows we'll see a lot more of the company they want to become."

Ricadela is a writer for BusinessWeek.com in Silicon Valley.