Redmond (WA) – It remains one of the more bewildering explanations for a major consumer product delay ever given: that some retailers and some manufacturers argued Windows Vista would be too difficult for them to promote and sell during the Christmas season, if it were launched in November rather than October. While few could possibly believe that Microsoft would have fabricated such an excuse out of thin air, the notion that businesses that depend on a company to release a product so that they can sell their own products at Christmastime, would petition that company to delay its release for logistical reasons, remains perplexing.
“I think that [Microsoft] has just successfully stopped PC sales until January,” remarked Michael Cherry, lead analyst at Directions on Microsoft, who attended co-president Jim Allchin’s analyst’s conference on Tuesday, and who heard his historic explanation first-hand.
And yet that explanation may very well be true. As the dust settles, three leading industry analysts with whom TG Daily spoke at length, including Cherry, have started piecing together a plausible scenario for how the companies that collectively comprise the Windows Vista sales force, believed they could save Christmas by effectively canceling it, at least in terms of revenue – which is the meaning of the whole holiday, from a retailer’s perspective.
I think that [Microsoft] has just successfully stopped PC sales until January.
Michael Cherry, lead analyst, Directions on Microsoft
“I actually think there was some truth to it,” Cherry stated. “The reason…is that primarily the OEMs, but the retailers as well, have a cutoff line that’s pretty early in the year, [after which] they have to be ready for that selling season. And they did not want to be in a situation where they had to have a contingency plan in case Vista wasn’t available. It’s very hard for them, in that part of the year, to change horses in mid-stream. If you’re an OEM or a retailer, you need to go into that season saying, ‘Here’s the best offer that I have.'”
Cherry’s theory is that Microsoft’s partners didn’t want to enter the holiday season without a contingency plan. If Microsoft could delay Vista this late in the game from late September to November – which is what it had planned to do originally, and what it is doing for high-volume business editions of Vista – then it could conceivably do so again. So rather than take the hit and be caught off-guard, partners might rather take the hit and be ready for it…It’s not a very endearing explanation for these partners, granted, but it’s plausible.
Carmi Levy, senior research analyst with Info-Tech Research, sees a similar logistical “perfect storm.” Microsoft had always promised it would only ship Vista when the product was absolutely ready for prime time, Levy pointed out, and now Microsoft is keeping that promise. So the trigger for the delay, he believes, “has to do with the added complexity of releasing an operating system into the consumer space. There are lead times when you need to release the operating system to manufacturers, so they can then integrate it with their new hardware. And compared to past operating system revisions and upgrades, this is not just an incremental growth of functionality or hardware requirements over XP; it’s a fairly significant growth. As a result, the manufacturers want to make sure they are ready to take Vista and integrate it with their upgraded hardware, and get it out into the market without creating a post-sales support nightmare.”
It may seem, at first, a little altruistic that Microsoft might want to spare consumers the discomfort of phoning technical support while there’s still trim on the tree and turkey in the oven. But there are more financial considerations to take account of here: Free technical support, especially to millions of potentially irate consumers, is expensive. “Even if everybody wants to book the revenue before 2006,” remarked Levy, “I think the potential risk of having a support debacle during the Christmas season probably outweighs the one or two points that you might make by booking that revenue before year-end. Better to push it into 2007 and be absolutely ready, and be sure that you have the resources on hand to manage what essentially is a very significant change to the way you manufacture and distribute and deliver products.”
If partners were largely to blame for pushing Vista out past Christmas, and not some unyielding, underlying technical issue as some have suspected, then logistics is playing a significant factor. “Just like launching a rocket,” Levy said, “launching an operating system is an incredibly complex undertaking. And as a result, as you get closer to ‘T-minus 10,’ the intended liftoff time, you are going to run into some variables or instances that you could not have foreseen, and you will very likely need to delay.”
Microsoft’s Jim Allchin attempted to explain that to analysts on Tuesday. “This is a blockbuster release,” Allchin said. “It takes a lot of time to do the appropriate qualifications, and also some of the manufacturers have their systems built off-shore. Those come by things like boats. So there’s logistics that has to take place here.”
So we blame the boats? “A lot of these things, I think we need to recognize, might very well be outside of Microsoft’s control,” remarked Carmi Levy, referring to boats and other logistical matters. “Microsoft isn’t doing this on its own; Microsoft is in the middle of a very complex ecosystem of partners who are all working together to get this product into the market. So even if Microsoft’s end of the deal was held up, and even if Microsoft was able to hit all of its markers, and check off all of its schedule requirements, it’s not to say that a partner wouldn’t have thrown a wrench into the works and thrown them off the critical path.”
…Some of the manufacturers have their systems built off-shore. Those come by things like boats.
Jim Allchin, co-president, Microsoft
Gordon Haff, senior analyst with Illuminata, has also been a co-developer of operating systems himself, and has been party to many a meeting where executives have decided that dates must slip. Although he can sympathize with Microsoft’s decision, he believes the reasons for it may be more internal than external. Normally when you’re developing something as complex an an operating system, it’s more than likely that an issue could crop up which could evolve into a “show stopper.” “But given that we are in March,” Haff remarked, “it seems to me unlikely that a single known technical issue would be causing a delay nine months ahead. Rather, looking at the program collectively – number of bug reports, number of bug fixes, feature completeness – Microsoft decided, ‘You can’t get thar from har.’
“This probably did not come out of the blue, but I think the product managers been looking at those trend lines and [thinking] it’s going to be tight, but if they get the gold masters in time for holiday sales, [it could work],” added Haff. But then comes discussions with the OEMs, plus an evaluation of the “weekly rollups” – collective builds of the OS thus far – all of which could have weighted down those trend lines. Just by looking at the weights on those lines, he said, product managers could conclude, “‘Things aren’t going the right direction. There’s just no way we can make those dates at this point, based on what we know of the past development projects, based on what the current trend lines look like.'”
“I don’t think this is a decision that Microsoft wanted to make. This is a decision that Microsoft had to make,” said Info-Tech’s Carmi Levy. “When a company is looking at the critical year-end period when there’s this huge bubble of revenue to be made, and investors are watching the company’s performance during that period very closely, no company in its right mind is going to willingly or lightly push revenue off into the next year, because they are going to get beat up on the market. If you see what’s been happening since that announcement, that’s exactly what’s happened to Microsoft. It’s getting pillaged. What I’d like to think is that the majority of their ecosystem, of their partners, were in fact ready to deliver it, but it could’ve been something as simple as one or two partners who were just large enough to give Microsoft cold feet, and prompt the company to call off the whole works.
Who won’t buy Vista now, and when won’t they buy it
The damage to Windows Vista’s sales, our analysts believe, will be across the board, and some of that loss will take effect immediately. Already, decisions are being made or already have been made that affect how many PCs will be running Vista during 2007.
“The people I have the most empathy for, the people I think are hurt the most, are the small- to mid-size businesses,” said Michael Cherry of Directions on Microsoft. In Jim Allchin’s conference, he confirmed that Vista’s code base will be ready in November, and could conceivably have been ready for release to manufacturing (RTM) at that time. Some volume licensees will see it soon afterward, but consumers will have to wait until January. But where’s the dividing line between a consumer and a business, in Allchin’s mind?
No company in its right mind is going to willingly or lightly push revenue off into the next year, because they are going to get beat up on the market.
Carmi Levy, senior research analyst, Info-Tech Research
To get some insight into that question, Cherry asked Allchin, what will happen to Vista Ultimate Edition, the top-tier version (or “SKU”) that will incorporate all the features of both consumer and business segments? Will it wait until January as well? “We’re not changing the SKU plan,” Allchin replied, “and we are releasing all SKUs internally at the same time. So when we’re done, we’re done, and it’s just a question about how it’s being provided to the particular channels, if you will.” It was almost an answer.
Yesterday, Microsoft confirmed to TG Daily that only Vista Business and Vista Enterprise will be available to volume licensees in November, not Ultimate. This got Cherry to thinking, what is it about Ultimate that would prevent volume licensees from having access to it as well? And what is it about the other two SKUs that particularly suited themselves to volume customers, but not the rest of the world, including small businesses that purchase operating systems that are pre-installed on their PCs?
“If you’re a mid-sized business today whose machines are aging, and you wanted to replace them out of this year’s budget,” argued Cherry, “you probably are buying a machine that’s capable of running XP SP2. And if your kind of rule of thumb is [that you] buy machines with what the OEM put on them, and then leave them alone until you buy new, you’re going to stay with XP SP2 for the next four to five years.”
In other words, small businesses are often forced by their own budgets to make new PC purchases before year’s end. And for those businesses that must purchase PCs by the end of 2006, they may be locked into Windows XP Service Pack 2 for the next several years. Info-Tech’s Carmi Levy confirmed that assessment: “If your lease is ending on December 31, you don’t have a choice,” he said. “You have to get a new box on your desk before December 31, or you risk running your business for a couple of months without one. That’s not acceptable.”
Very small businesses with just a few employees, explained Levy, will opt to stick with XP for now, because that’s all they can afford. But some slightly larger businesses may wait until January to pick up one or two Vista systems for the top executives, rather than the dozens or more they might have purchased under the superseded purchasing plan. The executives’ systems will get passed down to middle management, the managers’ systems will get passed down to the mail room, and the mail room PCs will end the cascade by winding up on the admin’s desk. “Not optimal for these companies, but they don’t really have much of a choice,” he continued, “because at the end of the day, it really doesn’t matter what operating system you’re running; what matters for a business is that the applications that it runs are supported.
Buy a Windows machine today…and then call me and tell me you are confident you have a machine that will run Vista. Because I don’t believe you can do that.
Michael Cherry, lead analyst, Directions on Microsoft
“The truth of the matter is, if you buy XP in December or you buy XP in June of next year, it’ll still deliver the same business functionality that it does today,” Levy added, “so the applications that you have been running for years will continue to run. Vista is not going to change that.” What’s more, businesses that rely on applications that were designed for XP will need to beta test those apps to work with Vista. If the earliest time they can test those apps is January – well after their own budget period – then it might as well be June. “If you haven’t tested your apps under Vista,” Levy said, “then any delay – even if it’s a quarter or three months long – is irrelevant to you. You don’t care. [As] a business, all you care about is if the OS runs your apps. And XP will do that on January 1 as it will on December 31.”
If the outlook for small business sales appears bleak, the forecast for consumer sales looks like Vista just dropped off the planet. “Leaving aside debates over how much better [Vista] really is, it will be a new thing to sell,” described Illuminata’s Gordon Haff, “and having new things to sell is something that companies like to have, and that’s not going to be there. So on the one hand, [Vista’s absence] takes away a reason that people might have bought a new PC for Christmas, and in fact, it puts a real reason why you might want to hold back on getting that new PC: mainly that the new operating system that everybody, or at least Microsoft, had said is so great, isn’t available.”
“Let me give you a challenge,” proposed Michael Cherry. “Go to any Web site today, or go into any store – Best Buy, CompUSA – buy a Windows machine today. Leave that store, and then call me and tell me you are confident you have a machine that will run Vista. Because I don’t believe you can do that.”
It’s perhaps Microsoft’s own fault: The company had been promoting Vista as a launch vehicle for an entirely new class of premium consumer PCs – a class whose value would be substantiated by an all-new Windows System Performance Rating (WSPR). Top-tier systems, such as Dell’s new ten-grand XPS Renegade 600, would probably be rated a “5” – at the top of the scale. These are systems that are best sold with bows and ribbons, which does not go well with the month of January.
“If you’re buying a new machine today, you don’t want a machine that can ‘run’ Vista. You want a machine that can exploit Vista,” said Cherry. “You cannot buy that machine today.”
To provide a little bit of evidence to that end, Cherry used Microsoft’s own WSPR performance ranking tool to assess the relative value of his Turion 64-based system with 1 GB of memory, an ATI Radeon Express graphics card, and two hard drives. The ranking came back a 2. “I have a whole problem with this kind of argument that Vista is going to help my productivity. I pretty much produce as many articles in a week as I can. How does a 2 relate to what I do?”
If there was ever a time to make an argument in favor of what makes a “5” a “5,” the holiday season was the perfect – if not the only – time to do it, argued Cherry. “The thing about the Christmas season was, if Vista really had any excitement to it, if they could get a kind of ‘wow’ factor about it, that was the time to strike with [consumers], because they were already somewhat predisposed to spending. When you [catch them] with the ‘wow’ factor, and they’re not predisposed to spending, they go, ‘Well, that’s nice.'”
One temporary solution which Cherry proposes is for Microsoft to offer current consumers forced to buy XP SP2 systems a kind of voucher, which would authorize them to trade up to Vista for a low – or for no – price. He advises Microsoft, “Why don’t you just guarantee that anybody that buys a PC with XP SP2 on it today gets some sort of reasonable upgrade? Maybe it’s free, maybe it’s cost of the Vista media, which would be around twenty bucks, tops. Why not make that kind of an offer?”
Carmi Levy believes that route could be dangerous. A voucher system relies on customers’ willingness to upgrade, which pretty much sets the agenda for customer support, he argued. “That’s just a recipe for help desk disaster. The way Vista is going to be optimally shipped, in order to be optimally a stable and viable platform, is if it’s pre-loaded. The upgrade path is always the path of least preference, because consumers upgrading their own operating systems will generate the kind of activity through the help desk that’s going to cut the margin.”
So instead, Levy predicts, “demand for PCs – for desktops and laptops – through the holiday season, is going to flatten, [while] a certain percentage of the market that does not need computers before year’s end, stands on the sidelines and waits for Vista to ship. For them, I think the lineups at Circuit City are going to be a little bit less deep leading up to Christmas and on Boxing Day.”
If I’m a kid, a voucher for a fully loaded Vista PC that’s going to ship in a couple of months, isn’t going to do it on Christmas morning.
Carmi Levy, senior research analyst, Info-Tech Research
Cherry perceives a kind of nightmare scenario for PC makers, where the money that consumers would have spent on a new Vista-based PC doesn’t get postponed along with the operating system. “It doesn’t come back,” he pronounced. “Because it’s the holiday season, let’s say that a person had n amount of dollars that they were looking to spend. I don’t think they’re going to put a little note under the Christmas tree to Johnny that says, ‘Hey, we’ll get you a computer in January.’ They’re actually buying something else this year, and they’re going with whatever they had.” The only PC sales that Vista is likely to recover in January, Cherry believes, comes from first-time buyers – and those are the buyers who may be in the market for a “2,” not a “5.”
The Vista scheduling change, in Cherry’s opinion, leaves the consumer saying, “‘Maybe instead of buying that computer, we’ll buy that big flat-screen TV for the family.’ I think that a certain number of the dollars will just be diverted to other electronics purchases. They won’t come back for a computer, either. Once those dollars that were apportioned for [a PC] are spent for this year, they are spent for this year.”
Carmi Levy agrees. “I think what’s ultimately going to happen is, some of the discretionary gift buying budget that families and individuals would have devoted to Vista-loaded PCs for the Christmas 2006 season, will instead go out of the PC market and go to other alternative forms of electronics and home entertainment,” he remarked. “You can’t come home Christmas Eve and not have something to put in the stockings for the kids to come downstairs and find the next morning. I’m sorry, but if I’m a kid, a voucher for a fully loaded Vista PC that’s going to ship in a couple of months, isn’t going to do it on Christmas morning.”
Is there a solution to the dilemma of the monolithic behemoth?
Even if it wasn’t Microsoft that, in the end, believed Windows Vista would be best served by a post-holiday release, it is indeed Microsoft that made that final decision. As a result, the itineraries of countless other manufacturers and supporting companies, along with those of millions of customers, have just been skewed, if not altogether tossed into the wind. So why do companies that call themselves “partners” let this happen to them? Is there a breaking point, where these companies are faced with no recourse but to conceive an alternative, a hedge, a “plan B” for future Vista-like situations?
Probably not, agreed our analysts. “In the consumer space specifically, it’s really hard to see any of the hardware manufacturers aggressively pushing an alternative to Windows,” argued Illuminata’s Gordon Haff, “unless they can see some incremental volume in there for them.”
What matters here isn’t what Dell wants to sell, but what consumers want to buy.
Gordon Haff, senior analyst, Illuminata
Dell is a big enough “partner,” one could argue, that if it wanted to push for an alternative – even for just a sizable minority of the market…say, a reasonable build of Linux – it could probably do so. But Dell won’t make that decision for itself, Haff believes. “Dell, at the end of the day, will sell whatever their customers are demanding, and that Dell can make money on,” he told us. “If end users start to turn away from Microsoft, or IT purchasers or consumers start turning away from Microsoft in significant numbers, and want to buy something else from Dell, that is a whole different story. But Michael Dell isn’t going to wake up one morning and say, ‘I’ve just had it with Microsoft; I’m not going to sell Windows any longer.’ That’s just not a realistic scenario…What matters here isn’t what Dell wants to sell, but what consumers want to buy.”
Perhaps the true problem lies not with the operating system itself, but with the nature of the behemoth it has become. Maybe Windows has grown and evolved to such a stage that colossal overhauls such as Vista may have become too unwieldy to be manageable. Gordon Haff imagines a time in which the intelligence, the logic, the necessary underpinnings, the “foundations,” the APIs – all the layers upon layers of Windows are delivered in a more incremental fashion.
But that time is apparently not very soon. “I would expect we would see at least one more Windows, something that we would recognize as a Windows operating system,” Haff predicted. “That is not to say that Microsoft will not look at ways to move towards more modular architectures. That’s Microsoft’s bigger problem here, that everything is so monolithic – the ‘welded hairball’, as Scott McNealy called it.” He believes that Microsoft may at last have hit something which engineers call a “scale point,” representing the limits of upward scalability – a maximum load “in terms of number of components and features, that has exceeded the limits of software engineering.”
[Businesses] are looking at this big, costly changeover, and they’re questioning it, and they’re wondering why they even have to do it in the first place.
Carmi Levy, senior research analyst, Info-Tech Research
The alternative to building up the hairball into eternity, Haff foresees, is a network distribution model where “new features are automatically delivered through the network, as opposed to having to be delivered in a big, monolithic operating system sitting in a desktop.” It’s not that Microsoft hasn’t thought of this before. It’s just that it’s never had so much incentive, up until now, to actually do it.
Carmi Levy sees the same writing on the wall, and notices it’s Microsoft’s customers who may be the ones writing it. “I think any time there’s a monolithic anything,” he remarked, “enterprises are best served by questioning the need to devote so much time, energy, money, and personnel to an endeavor that doesn’t really add value to the bottom line business function. I think you have to ask yourself the question, ‘What is Vista going to give me that XP does not?’ And for a lot of businesses today, they don’t have the answers to that question. So of course they’re looking at this big, costly changeover, and they’re questioning it, and they’re wondering why they even have to do it in the first place.
“Eventually,” Levy concluded, “I think the era of the large operating system is drawing to a close. I’m not going to say that Vista is the last major generation of them, but I think the writing is certainly on the wall, the clock is starting to tick, and the volume of the chorus for questioning why forklift upgrades of this type are even necessary, is starting to grow.”