Microsoft blamed for DSG profits shortfall

Shares in DSG hit a four-year low yesterday after the company said that sales of Microsoft's new Vista operating system had failed to capture the public's imagination, leading to a £20m profit shortfall at its PC World chain.

DSG had expected the new Vista system to lead to a massive spike in demand and stocked its shelves with boxes of software and new laptops pre-loaded with the new system in anticipation. Yet it appears that, despite the efforts of Bill Gates to "wow" the public with its most advanced operating platform yet, customer reaction was much more subdued than expected.

Kevin O'Byrne, DSG's finance director, said that the company had over-estimated the demand for Vista by as much as 50,000 products, meaning the retailer had to slash prices and come up with big promotions – including a laptop giveaway for new Orange broadband customers – to stimulate demand.

While it shifted 50 per cent more laptops than at the same time last year, PC World's margins took a battering as a result of the price cuts, equating to a £20m reduction in profit. Shares in the company fell nearly 9 per cent on the warning. DSG has lost a quarter of its market value over the past few months.

Vista is Microsoft's first new operating system in five years, replacing the XP platform that is widely used in PCs. Despite the system being designed for ease of use and boasting Microsoft's best security system to date, Vista has not created the same sense of excitement that new devices like the PlayStation 3 and the iPhone engendered. Instead, the new platform has led to customer frustration as it does not support older applications that users have previously purchased. Cust-omers loading the new system on to older machines have also been annoyed that the performance has been poor.

Microsoft said last month that sales of the XP system were some 40 per cent higher than Vista's when it was released in 2002.

Mr O'Byrne argued that he had been "disappointed with the lack of promotional support" from Microsoft. Despite Mr Gates' promises that the "wow is now" on Vista's launch, the buzz around the new product pales in comparison with the 1995 launch of Windows 95, which used the Rolling Stones song "Start Me Up" to great effect.

Analysts said that despite the teething problems, Vista is a better system but it will take time for consumer dem-and to build. "I don't think the ordinary Joe in the street has been waiting for the Vista upgrade. It is maybe optimistic to sell laptops on that basis as people will tend to buy one when they need a new one," said David Bradshaw, an analyst at Ovum.

John Browett, the new chief executive of DSG, will have his work cut out when he joins the company from Tesco in early December. DSG remains "cautiously optimistic" it will have a good Christmas trading per-iod with sales of games consoles, flat-screen TVs and digital cameras boosting its profits. DSG, Europe's second-largest electronics retailer, makes around half its annual profits over the Christmas period.