Slow Vista sales hit MS revenues as netbooks gain ground

Sales of Windows desktop software dropped 8 percent last quarter compared to a year ago, while Microsoft's server division revenues were up 15 percent, illustrating the rejection of Windows Vista and the acceptance of Windows Server 2008, an analyst said Thursday morning.

"Very disappointing results from the Windows Client unit," said Neil MacDonald, an analyst with Gartner. "But it was very predictable, especially after Intel's earnings report." Last week, Intel announced that its fourth-quarter profit plummeted 90 percent.

Revenues for the Windows client group totalled US$3.98 billion in Microsoft's second fiscal quarter, which ended December 31, 2008, down 8 percent compared to the same period in 2007 because what the company called the "PC market weakness and a continued shift to lower priced netbooks."

MacDonald echoed those reasons, but added more detail. "When people look at opportunities for cost savings, they first think about not replacing computers," he said. "They try to get another year of life out of their notebooks and desktops. And that goes right to Microsoft's bottom line [in the Windows client unit]. If PCs aren't selling, Microsoft's not making money."

But Windows Vista -- 2007's problem- and perception-plagued operating system -- also played a major part in the revenue drop, said MacDonald. "Compounding the problem is the fact that Vista has been a very disappointing release. That makes a bad situation worse."

MacDonald, along with fellow Gartner analyst Michael Silver, made waves last year by arguing that Windows was "collapsing" because of the operating system's increasingly bloated code base and inability to roll out upgrades in a timely fashion.

In a sideways fashion, Microsoft confirmed that Vista's sale were down significantly in the quarter. "There was double-digit declines in premium SKUs" of both the business and consumer lines of Windows, said Frank Brod, Microsoft's chief accounting officer, referring to the higher-priced editions, including Vista Home Premium, Vista Ultimate and Vista Business.

The bright spot, according to both Microsoft and MacDonald, was the growth in sales of "netbooks," the new category of small, lower-priced laptops. But even that came with a price. "The uptake in netbooks also played a part, because although there was growth in that segment, those machines are running Windows XP," said MacDonald. "Vista doesn't fit."

Microsoft makes less on Windows XP per copy that it sells to computer makers than it does for Windows Vista.

While the client-side revenues took a dive, sales for the Server and Tools division were $3.74 billion last quarter, a 15 percent increase over the same period in 2007. "Double-digit growth, that's fantastic results given this economic climate," said MacDonald.

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