Windows 7 May Not Be Silver Bullet For Microsoft
October 21 2009 - 12:30PM
Dow Jones News
Microsoft Corp.'s (MSFT) Windows 7 operating system is expected
to be a vast improvement over its predecessor, Windows Vista. But
that doesn't mean it will automatically juice sales and profits the
way previous operating systems have.
Redmond, Wash.-based Microsoft hopes Windows 7 - which launches
on Thursday - will burnish its core product, the Windows operating
system. Some version of Windows sits on an estimated 90% of the
world's computers. But corporate customers avoided Vista, which
needed lots of computing power to run and had compatibility
problems.
Microsoft has addressed those complaints with Windows 7. Now
timing, not technology is the key. The software giant is launching
Windows 7 amid a deep slowdown and a broad shift in corporate
technology use. That raises questions about whether the software
will be as profitable as past upgrades.
"The economics around the personal computer for Microsoft have
diminished," said Brendan Barnicle, a software analyst for Pacific
Crest Securities.
Microsoft has much riding on Windows 7. In fiscal 2009, the
Microsoft unit that makes Windows products reported a 13% decline
in sales, partly because corporate customers have shunned Vista. In
April, the company reported the first quarterly revenue contraction
in its 23-year history as a public company.
Microsoft didn't immediately respond to a request for
comment.
The company's difficulties are reflected in its stock price.
Over the last year, Microsoft shares have risen around 7%, while
competitors like Google Inc. (GOOG) and Apple Inc. (AAPL) have
posted much stronger percentage gains. On Tuesday, Microsoft shares
was little changed at $26.37.
Typically, new operating systems fuel Microsoft's revenue
performance. Revenues have posted double-digit rises for four
quarters after every new OS launch to date, according to Katherine
Egbert, an analyst at Jefferies & Co.
But as more and more computing takes place on the Web -
so-called cloud computing - the value of these upgrades is
diminishing. Corporate computers increasingly don't require
powerful operating systems - like Windows 7 - that they once
needed. A trend towards the greater use of smaller, lighter-weight
computers is also likely to eat into the profitability of the
operating system, analysts say, as smaller computers tend to
feature less expensive software.
Even Microsoft's partners have acknowledged Windows 7 may not
have an immediate effect on hardware sales. At a recent earnings
call, Dell Inc. (DELL) Chief Financial Officer Brian Gladden said
the computer maker - most of whose machines run Windows - thinks
the economy will be a more important catalyst.
Still, Windows 7 will likely find traction with corporate
buyers.
Roughly four-fifths of Microsoft's corporate customers are
running eight-year-old Windows XP, an operating system which
predates Vista and which Microsoft will stop supporting in 2014.
That will provide an incentive for customers to upgrade, said
Annette Jump, an analyst at research firm Gartner Inc.
And Microsoft resellers say their customers are enthusiastic
about Windows 7. CDW Corp. (CDWC), one of the largest U.S. software
resellers, says that 40% of its customers want to deploy the
software within two years.
"At this point in the (Windows) Vista cycle we were still having
the conversation about why to deploy," said Liz Eversoll, a
software specialist at CDW. "Now, we're way past that."
Still, Microsoft might not dramatically increase its profits
even if corporate customers start using Windows 7, analysts say.
That's because many corporations buy Windows on a license basis and
are automatically upgraded. In other words, Microsoft would have
received that revenue regardless of whether companies are using its
latest product.
Of course, "people not jumping ship to other operating systems
is obviously a good thing," said Dean Williams, an executive with
consultancy Softchoice.
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455;
jessica.hodgson@dowjones.com
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