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Last Updated: Thursday, 8 February 2007, 23:46 GMT
Microsoft at the crossroads
By Charles Miller
BBC Money Programme

Microsoft's Tjeerd Hoek
Consumers won't flock to stores to buy Vista

Microsoft has launched Windows Vista, but for the software giant more is at stake than the success of the new operating system.

There were dancers in front of the Taj Mahal, girls with laptops on the beach in Rio, and a massive Start button on the Great Wall of China.

It could only be a Microsoft publicity event. Last week, for the first time since 1995, the company launched two new flagship products at once: its new operating system Windows Vista and the new Office 2007.

Vista itself was the culmination of years of work by thousands of programmers, and an estimated $10bn of investment since the last major release, Windows XP. It surely deserved a bit of razzmatazz.

But there was a slightly artificial air to the worldwide launch. Microsoft itself acknowledged this was never going to be another Windows 95 - when the Rolling Stones' Start Me Up was the official soundtrack, and genuine public expectation produced queues of people waiting for computer stores to open at midnight.

Why nobody queued for Vista

Today, anyone remotely interested in new operating systems is home and online, not freezing outside closed shops.

MICROSOFT v THE REST
Operating system
96% of the world's computers run Windows
2.5% run Apple's Mac OS

Stockmarket value

Microsoft: $291bn
Google: $145bn
Apple: $73bn

Staff

Microsoft: 71,172 full-time employees
Apple: 17,787
Google: just under 10,000

In fact, before the launch, the most enthusiastic few million potential Vista customers had already tried it as a beta download, and sent Microsoft their feedback on early versions.

That was how the company conducted a massive public "debugging" programme before Vista was declared finished at the end of last year.

Cynthia Crossley, in charge of launching Vista in the UK, realised that any attempt to create events around what's known in PR circles as "midnight madness" - people queuing for hours - could too easily be ridiculed as an ironic comment on the serious delays Vista has suffered during its development.

Instead, Crossley went for an upmarket launch at the British Library, where 250 journalists were shown Vista by Bill Gates himself.

Gates enjoyed the event, because the Library's joint project with Microsoft, to make its best treasures available online through something called Turning the Pages, is right up his street. It's an application that lets you feel you are actually leafing through ancient manuscripts. Gates personally owns a notebook of Leonardo da Vinci's, which he has let the Library make available online, to sit alongside the Library's own Leonardo codex for the first time.

The Windows profit machine

STEVE BALLMER
Steve Ballmer
Born in March 1956, and grew up near Detroit
First met Bill Gates at Harvard University
Worked for Proctor & Gamble after graduation
Gates persuaded him in 1980 to leave his Stanford MBA course and become employee number 30 at Microsoft
Became Microsoft's president in 1998
Took over from Gates as chief executive in 2000
Will take full control of Microsoft in 2008 when Gates steps down from day-to-day involvement
Ballmer is the world's 31st richest man with a personal fortune of $13.6bn

If the launch was relatively low-key, then, there's no question of Vista's importance for Microsoft. Although the company likes to trumpet its range, from business to entertainment, Windows is still its flagship product.

It is found on more than 90% of the world's computers, and provides the bread-and-butter revenue behind the company's continuing growth and profits, now running at $1bn a month.

Vista itself is expected to be on 400 million computers by the end of next year.

Computer manufacturers and Microsoft have grown up symbiotically.

Microsoft refers to the manufacturers as its "partners". But while the computer makers are undercutting each other to death in a hugely competitive market, on its side, Microsoft virtually has the field to itself in providing the operating system that makes their PCs work.

The result is that while computer manufacturing has become a high volume, low margin business, Microsoft has maintained profitability on its Windows systems.

Software in the interactive world

But the business model behind Windows is unchanged since the first release 24 years ago, and there's now uncertainty about how much longer it will be viable.

On the day of the consumer launch, rows of packaged boxes of Vista software were hanging on the retailer racks, priced at anything from 99, to 250, depending on the spec.

VISTA PC SPECIFICATIONS
VISTA CAPABLE
800MHz processor
512Mb memory
DirectX9 capable graphics processor
PREMIUM READY
1GHz processor
1Gb memory
128Mb graphics memory
40Gb hard drive
DVD-ROM
Internet access

In this always-on, interactive world, the idea of having to visit a shop to buy your software begins to seem a little quaint - a leftover from the pre-internet, pre-broadband, era.

Steve Ballmer, Microsoft's energetic chief executive, acknowledged the changing environment when spoke to the Money Programme: "Software was a business that was relatively static. You got a CD or a DVD, installed it and boom you were done."

"Today's software is much more dynamic: it feeds off the internet connection and that implies not just an add-on, but a re-engineering of the fundamental experience, to deliver something that can be more convenient, easier etc," Mr Ballmer said.

Software as a service

Long-term, Microsoft wants to convert its Windows customers to subscribers: they'd pay for continuous updates from Microsoft.

It's a model the company already has for business users. Windows would become a service that keeps your computer up to scratch, rather than a product you occasionally purchase from a shop.

Bill Gates
Bill Gates is the chief software architect of Vista

It's part of a strategy that Mr Ballmer calls software-as-a-service, and he says "it's a big, big deal for us".

The difficulty for Microsoft isn't the technical one, to deliver its updates online; it's more a business and cultural one.

The company will be entering the world of Google, the company that offers free downloadable applications, like Google Desktop, which cheekily offers a way to search your Windows computer.

But Google's income doesn't come from that part of its business; the applications are there to establish a beach-head on people's desktops, to keep Google in their faces, and encourage them to use its profitable, advertiser-based search product.

The Vista promise of better security is a real attraction... but while the upgrade option may look a cost effective solution, it's a fragile process

For Microsoft to make software-as-a-service work, it will have to gradually replace its Windows sales income with advertising and subscription revenue.

And there may be another, more urgent reason to do that: according to Brian Gammage of consulting firm Gartner, the delays in the release of Vista show that the sheer size and complexity of new Windows upgrades cannot be sustained in the current form anyway.

He sees the problem as "a crossroads for Microsoft".

Gates has announced his retirement from day-to-day work at Microsoft from the middle of next year, leaving Steve Ballmer to grapple with the future.

Mr Ballmer has never claimed to be a technologist, but he's shown himself highly effective in turning Microsoft's technology to profit.

He sees himself assuming the new role of "champion of innovation" within the company.

Don't count on him not being able to enthuse, chide and browbeat his 70,000 staff into turning the rhetoric of software-as-a-service into a reality.

The Money Programme: Coming to Your Screen - Microsoft's New Vista; on Friday, 9 February, at 1900 UK time on BBC 2


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The Money Programme takes a look at Vista



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