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Microsoft's Financial Troubles: The Wrath of Vista?

It was kind of like finding out that a person who's been in the hospital for an extended period of time has finally expired. It wasn't unexpected -- it was inevitable, actually, and anticipated -- but when the news landed it still hit with the sudden jolt of a rock on a windshield. All that's left to do now is assess the damage. 

Microsoft just spat the bad news out today, eschewing its usual post-market-close earnings announcement timing and instead deciding to drop a dead fly in the industry's morning coffee. The company announced layoffs and disappointing earnings, the pertinent details of which are recounted superbly by Redmond Developer News' Jeff Schwartz here. The bottom line? Layoffs, 5,000 of them in the next 18 months, with 1,400 of those coming today. Oh, and earnings that missed expectations.

Despite the unusual timing of the announcement and the therefore somewhat shocking effect of the news, Microsoft's revelation is hardly a surprise. As Microsoft guru and Redmond magazine columnist Mary Jo Foley notes, it could have been worse. Microsoft will still be a battle ship with more than 80,000 employees, even post-layoffs.

But another press release full of bad news isn't what the industry or the economy needed. On top of that, Microsoft is finished even trying to give guidance about future earnings, which doesn't seem like an especially positive sign.

As for partners, it's hard to say right off the bat what this will mean -- maybe not much. Microsoft's server and tools business, a big moneymaker for the channel, actually recorded a 15 percent increase in revenue year over year. In fact, Microsoft really took the biggest hit in its client revenue (read: Windows), which was off by 8 percent compared to last year.

Those numbers indicate that enterprise partners might actually get out of this situation relatively unscathed, given that most of them don't make much money from Windows or Office sales, anyway. Really, most don't make much money from selling software or hardware anymore -- it's all about services now. And there appears to still be plenty of Microsoft enterprise technology flowing from the channel into companies, ready to be implemented and customized.

The really interesting bit from the earnings report is probably of less interest to enterprise partners, but it's still interesting. Microsoft came out and said that while demand for PCs is dropping, sales of netbooks are starting to eat away at what would have otherwise been PC sales. Given that a lot of netbooks ship with Linux, that's a problem for Microsoft.

There are lots of reasons for Microsoft's troubles, the economy chief among them. But the PC-netbook thing is intriguing. On the one hand, it's easy to see why in a weak economy consumers are turning to lower-priced netbooks as opposed to PCs. But there's another factor in Microsoft's weak Windows numbers. Oh, yes. You know what it is.

This could be, at least in part, the wrath of Vista. Microsoft spun and spun and spun Vista -- and then finally gave up and started pumping Windows 7. The fact is that Vista hasn't penetrated the enterprise in any serious way, and we're guessing that a lot of consumers have avoided it as well. Just look at the downgrades to XP companies like Dell were offering long after the Vista launch.

The numbers don't lie. They seem, at least, to bear all this out. It hardly seems like a coincidence that Microsoft's Windows sales are sagging with Vista as the lead ship in the fleet. It bombed, and this appears to be the fallout -- not the main cause of Microsoft's woes, but a factor. Fair or not, problems resolved or not, Vista couldn't overcome the compatibility issues and massive hardware requirements that sunk it right as it left the harbor. Microsoft also created a fair amount of ill will by continuing to push an OS the public had pretty soundly rejected.

Early accounts suggest that Windows 7 is much better than Vista -- we've heard it described as everything Vista was supposed to be. No wonder Microsoft's in such a hurry to release it and confine Vista to the scrap heap of history. (However, maybe Microsoft should pay attention to this netbook thing and note how small, cheap and simple is starting to trump big, expensive and complex. Just a thought.)

The rock has hit the windshield. Will the glass shatter or just crack? Stick around.

How will Microsoft's financial problems affect you? Let us know at lpender@rcpmag.com.

Posted by Lee Pender on January 22, 2009 at 11:55 AM


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