Microsoft milks the cow one last time with Vista

The PC is not the long-term driver of this business. Can they compete in online service?
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The Independent Online

For all the razzamatazz, the "human billboards" advertising the product and the showy launch in Manhattan's Times Square yesterday, Microsoft's new operating system, Windows Vista, is a pretty underwhelming piece of software.

Not that it isn't a brilliant achievement, which offers a snazzy new look for your computer desktop and promises to fight off the legions of viruses and spyware that infect PCs using previous versions of Windows. Just that it is not the great leap forward in the computer user experience that, say, the launch of Windows 95 was, when people queued around the block to buy the upgrade. In many ways, it is a defensive product, an attempt to catch up with developments that are already threatening to undermine the greatest software franchise in history.

The trouble is that the great leaps are not happening in the software inside the PC any more; they are happening "out there" among the servers and the services being offered over the internet. The PC experience doesn't just come in a box marked Windows any more.

The consumer launch of Vista will be a success. It will be preloaded on pretty much every home PC sold from now on and will therefore be on about half the world's personal computers by the end of next year. It will also almost certainly be a success among businesses too, although corporate IT managers are likely to roll it out across their organisations more cautiously, once they have worked out how to adapt it to their particular needs and Microsoft has ironed out any early bugs.

Microsoft shares have been hitting four-year records now that Vista is finally here, after such long delays, five years after the release of the last version, Windows XP. Even in lean years without a major upgrade, Windows accounts for 30 per cent of the company's $44bn in sales and twice as much of its operating profit. Now Vista is going on sale at a higher price than XP, and the hype surrounding yesterday's launch should further spur sales of PCs (so three cheers to Bill Gates from Dell and Hewlett-Packard and other computer makers).

The launch of the first Windows in 1985 cemented Microsoft's dominance of the PC software market, giving birth to a cash cow that has turned it into a $300bn company damned in Europe and the US as a monopolistic behemoth. With the launch of Vista, the cow gets one more great milking. It is probably the last.

There are several forces eroding the power of Windows. First, an old threat resurgent, in the form of Apple's growing share of the home computer market. The success of the iPod has encouraged consumers to look again at Apple's other products. Meanwhile, Steve Jobs is actively promoting the idea that Windows Vista only brings Microsoft into line with innovations made on the Apple operating system earlier this decade. A new, more advanced Mac operating system, called Leopard, is being launched in the spring.

The second threat is the growth of rival software services from internet-based companies. And third, there are real unanswered questions over the future role of the PC in the home. As the power of Windows erodes, Microsoft is having to become a very different sort of company.

Aside from the vital security improvements, the interesting thing about Vista is how many of the new features are those which are available from other sources already. The new sidebar on the desktop - which pulls together things such as your personal calendar, news feeds from the internet and a search function spanning your hard drive and the internet - sounds a lot like the product being offered to download for free by Google. Parental control functions are being built into Windows for the first time, but they have long been available as software for purchase.

No wonder Vista took five years to develop, it has become so complex. Michael Silver, analyst at Gartner, the market research firm, says future Windows developments will have to be broken into more manageable parts. "They have to get better at delivering modular products and at reducing complexity, allowing them and their customers to add more incremental features over time rather than all at once," he said.

Microsoft says it already does a little of this, since it updates Windows regularly for users who connect to the internet. Bill Gates said earlier this month: "Already the idea of updating their machines, providing them with better software and security improvements on an ongoing basis, it's a well-defined part of the Windows experience. And more and more services come along. So we've come a long way from the idea that this is just a product you get one time and it stays the same."

Ray Ozzie, the creator of the Lotus Notes e-mail system, who has taken over from Bill Gates as Microsoft's chief technology architect, has been trying to imbue the company with a new zeal for this form of internet delivery, encouraging software engineers to literally think outside the box. But if software is no longer purchased in one complete package, what business model will Microsoft have to adopt?

With competition regulators having forced Microsoft to lift its skirts a little and allow rivals access to more of the Windows codes, such additional features from rivals become more viable.

Inevitably, there will be more competition at the margins of what Windows offers. Such competition mirrors what is already starting to happen to Microsoft's ubiquitous suite of Office software products, which includes Word and Excel spreadsheets. Google and others offer similar, albeit currently more basic, products on the internet, with files stored on their own servers rather than the PC's hard disk. The new Office 2007, also launched yesterday by Microsoft, adds some of this online capability, allowing users to find their files from any machine, but here again Microsoft is on the defensive. If software is replaced in large measure by online services, Microsoft is set to find itself one player among many - as its MSN e-mail, messaging and search engine services do, in competition with Yahoo and Google.

PC use has soared as consumers have used it as a means of accessing the burgeoning world of entertainment on the internet, but these days so many devices connect to the net - consoles allow you to play other gamers across the world, videos and e-mails can be accessed on mobile phones. Microsoft has failed to dominate the operating systems of these devices as it has those of the PC. Its strategy has been to start building the devices itself, with some success in Xbox. It is early days for the Zune music player.

Jason Maynard, an analyst at Credit Suisse, says: "The PC is not the driver long-term of this business. The question is, can they make inroads against the likes of Google in online service? Can they get Xbox and Zune to make meaningful profits? These are the future of the industry and it's got to be the future of Microsoft."

In all these areas, Microsoft is a latecomer. A latecomer with deep pockets, sure, but those pockets will shrink as the power of Windows erodes. No wonder it is milking the launch of Vista for all it can.