Closing the Door to Microsoft Vista

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Alaska Airlines (ALK) is among companies that see diminishing value in running the latest Microsoft desktop technology when so many applications are available via a Web browser. "There's no business value in us continuing to chase that upgrade cycle," says Senior Vice-President and CIO Bob Reeder. So as PCs need replacement, the airline buys Vista-equipped machines for its roughly 2,000 office workers from Dell (DELL), then exercises its right to downgrade the machines to XP. About 8,000 PCs used mostly by gate agents and airport crews run a variety of older Windows versions. Reeder says the company plans to skip Vista.

Waiting to Upgrade

Vista delivers security improvements over XP, but doesn't offer compelling features that users clamor for, analysts say. So as IT budgets stagnate or decline, the new operating system isn't winning the war for resources. "Vista doesn't look like a good expenditure of money," says an executive in charge of IT buying at a large engineering and construction firm, who wasn't authorized to speak about his company's purchasing. The IT department is concerned about the cost of new hardware that can run Vista, and the time it will take to move software.

Corporate technology managers and Vista users have pilloried the system for a host of other annoyances and incompatibilities (BusinessWeek, 1/23/08), and many are opting to put off Vista deployments—or forgo the software altogether. Just 7% to 8% of business PCs at clients of Gartner (IT) run the system, and many CIOs are asking for advice about how to skip it, according to the consulting company.

Transco Railway Products, a Chicago maker of railcar parts, may leapfrog Vista because it bought new computers just before the system's release, and probably won't replace them for another year and a half. "We'll probably wait for the next operating system," says Chris Kuersten, Transco's IT manager.

Vista and the Bottom Line

The lack of urgency for upgrading to Vista is starting to hurt Microsoft financially. After two quarters of strong growth, sales in the desktop Windows group, the company's most profitable, fell 2%, to $4.03 billion, during the fiscal third quarter, which ended Mar. 31, leading to an 11% drop in profits for the quarter (BusinessWeek.com, 4/25/08). Microsoft can't afford too many slips like that, since it uses Windows and Office profits to subsidize money-losing efforts including Internet advertising, where it lags Google. Microsoft will likely pour even more money into search engines, Web software, and online ad tools in the wake of its failed bid for Yahoo.

Brent Thill, software research director at Citigroup (C), says sales of Windows desktop products should increase 11%, to $4.2 billion, in the quarter that ends in June. But Vista adoption is still short of where Microsoft would like it to be—just 65% of Windows copies sold in the third quarter were Vista and about 35% were Windows XP. Microsoft wanted the number at 80%, according to Thill. "It's just not taking off," he says. Microsoft attributed the sales shortfall to a comparison with Vista's first quarter on the market, software piracy in China, and unsold PC inventory, but investors are looking for signs of deeper trouble. "Everyone's still scratching their heads, asking, 'Is there something else going on?'" he says.

A More-Modular Windows?

There's plenty afoot at Microsoft headquarters in Redmond, Wash., where developers are hard at work on the next version of Windows. Executives aren't saying much about Windows 7, lest they risk being accused of overpromising and underdelivering again. However, Microsoft CEO Steve Ballmer has sworn the company would never again have a five-year gap between releases, like it did between XP and the oft-delayed Vista.

Chairman Bill Gates and others have hinted that Windows will become more modular (BusinessWeek.com, 1/30/07), letting Microsoft release portions of the product, including its Web browser, on a faster pace. And analysts say Microsoft will likely use virtual machine technology to run older programs, freeing Windows from the burden of having to support a slew of outmoded code, which could step up release dates.

There are other signs of change in Microsoft's approach to Windows. The company on Apr. 22 took its boldest step yet toward unifying its PC desktop franchise with the Web, announcing an online service called Live Mesh that lets users share files among their various PCs, and eventually mobile phones and Macs, within an online version of their desktop. The product, in test mode for now, illustrates Microsoft's strength at encouraging maverick groups—something it will need more of to take on Google and rewire Windows for the Web, says analyst Rob Enderle, principal of the Enderle Group consultancy. "Live Mesh represents the company Microsoft is trying to become," Enderle says. "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.