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Vista: long-term burn, not short-term sizzle

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Analysis Microsoft's $500m Windows Vista launch on Monday was the culmination of months of heavy sell intended to persuade the company, as much as everyone else, that not only is the operating systems is essential to users' computing needs, but also that it will translate into sales gold.

If bullishness were revenue, Microsoft is well on its way to a bumper fiscal 2007 and 2008. Windows Vista is supposed to out-ship Microsoft's last client - Windows XP. And Windows Vista will break all records bar Windows 95, by hitting 200 million PCs a mere 24 months after this month's launch, according to Microsoft.

On the latter claim, that would equate to almost all the PCs in America upgrading.

Unfortunately, money talks, not marketing, and Microsoft has been reticent in providing guidance for the period when Windows Vista would ship, lest these numbers provide something solid to work with. Until last week, that is.

Microsoft's second-quarter results show what the company actually thinks is possible with Windows Vista and also allows for some comparative analysis. Looking to Microsoft's current third quarter, when Windows Vista debuted, and the full year - which ends in June - Microsoft is projecting revenue of between $13.7bn and $14bn (quarter) and $50.2bn and $50.7bn.

These represent a potential increase of between 15 and 18 per cent and 13 and 14 per cent respectively.

Windows - and Office which was also updated with Office 2007 Monday - do not account for all Microsoft's revenue, but they are core business and hugely important drivers for the company.

While these percentage increases are a little higher than Microsoft's quarterly and annual growth for the previous fiscal year, they are not exactly sizzling. The company hit 16 and 13 per cent in last year's third quarter and full year.

For the PC business as a whole, Microsoft is now predicting an increase of between 11 and 12 per cent in revenue for fiscal 2007 to between $800m and $1bn, up from previous guidance that Microsoft pegged at between nine and 10 per cent. The crucial thing to remember is that Microsoft's PC business also includes Windows XP, which Microsoft and partners won't be marketing but is still available.

The role Windows XP plays in this mix of numbers will become interesting in three scenarios: if Microsoft fails to differentiate between "Vista Capable" or "Premium Ready" machines in the minds of consumers and those consumers default to what they know - Windows XP; consumers decide that a Premium-Ready PC is too beefy for what they'd originally wanted and stick with what they are used to - Windows XP; businesses take the advice of Gartner and postpone moving until their Windows XP generation of machines are retired or Windows XP really does start to fall short of their corporate needs.

So far, neither consumers nor businesses have been given a killer argument to upgrade. The big ticket features are improved security (mentioned during launch Monday and expected to be talked up at next week's RSA Conference in San Francisco by Bill Gates), parental controls (boosted during Monday's launch) and the Aero interface - which consumers can't get their hands on unless fork out dollars extra for that beefier PC. Based on this check box list of features and the kinds of mixed reviews of Windows Vista has been receiving, don't expect a Windows 95 lemming-like wave of upgrades.

PC makers, if not Microsoft, have certainly sensed something in the wind - apart from the strong whiff of overly strong marketing. Pacific Crest analyst Brendan Barnacle reckons OEMs have cut their component orders for Widows Vista PCs as neither they nor retailers believe demand for Windows Vista will be very strong. According to Barnacle: "Although Vista is an improvement over Windows XP, we have been skeptical that it would drive consumer demand. The commentary from the PC supply chain proves another reason to be skeptical about near-term out performance from Vista."

With Microsoft's financial year ending in June and Gartner and Barnacle betting on long-term adoption, you should be watching Microsoft's guidance for the following two fiscal years - 2008 and 2009 - for the real proof of mass adoption. For those forecasts, you've going to have to wait at least another 12 months. ®

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