January 28, 2007 10:41 pm

Vista marks end of an era for Microsoft

The stroke of midnight on Monday night will be a defining moment for Microsoft. After more than five years of work, several delays and an about-turn that saw it drop part of the original design, personal computers loaded with the long-awaited Windows Vista operating system will officially go on sale.

The moment also marks a turning point in the history of the world’s biggest software company, as Microsoft turns its attention more fully towards a future software industry that is likely to look very different.

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“It probably is the end of an era,” says Michael Cusumano, software expert and professor of management at the Massachusetts Institute of Technology.

The methods Microsoft has relied on to develop and to deliver software – including the latest releases of Windows and the Office suite of applications, which also goes on sale today – are going through a fundamental change.

That is partly because of what Mr Cusumano calls the internal “trauma” caused by its struggles with Vista. Never again: in future, he says, Microsoft will release less ambitious, and more frequent, updates to Windows.

However, it also reflects a deeper change in how the software business works.

With “software as a service” the industry’s new mantra – referring to the way companies such as Google or Salesforce.com deliver a service over the internet that is powered by software running on their own servers – a post-Vista Microsoft will refocus its efforts towards online services, says David Smith, analyst at research firm Gartner.

“You’re going to see a shift between what’s delivered as Windows, and what’s delivered as Windows Live,” the range of consumer internet services that Microsoft announced more than a year ago, he says.

The pressure to change will be felt first with Office, where Microsoft is starting to face competition from online services offered by Google and others, says Rick Sherlund, software analyst at Goldman Sachs.

Microsoft’s old way of doing business will not change overnight. In the short term, Vista is expected to represent another powerful product cycle for Microsoft’s phenomenal desktop software cash machine, helping to lift the company’s growth rate back from less than 10 per cent, where it dipped two years ago, closer to 15 per cent, according to most Wall Street forecasts.

Vista could also stimulate demand for a range of other current Microsoft products and services.

“We look at Vista as the platform for how the digital lifestyle will evolve,” says Brad Goldberg, product manager for the Windows Client business. Translation: software that is easier to use, supports high-definition video and is less vulnerable to security threats could prompt faster adoption of digital media, lifting demand for everything from Microsoft’s Xbox 360 games consoles to the new home servers put on display this month.

“They’ve got the wind at their backs at the moment,” says Mr Sherlund, pointing to the new spurt of growth from several directions, including Microsoft’s server business. Vista “gives them stronger growth and probably allows them to fund new ventures” such as the push into internet services.

However, this leaves some fundamental questions unresolved. By the time the Vista product cycle matures, many analysts expect the changing software landscape to present a more serious challenge to Microsoft’s traditional business model and culture.

Fundamental changes in technology architecture, of the type now taking place around the internet, seldom favour incumbents, whose ways of making money are built upon an earlier technology.

Advertising-supported services delivered over the internet have become the biggest challenge to Microsoft’s approach to doing business.

Under Ray Ozzie, Bill Gates’ successor as chief software architect, Microsoft has responded with a strategic vision focused on “software and services”. While internet services become more important, according to this view, they do not weaken the need for software-rich “client” devices such as PCs, cell phones and games consoles.

Even if Microsoft is able to forestall radical business model disruption, it still has to prove it can build a successful services business. Just as important is an online advertising system needed to “monetise” these services. To judge by its latest earnings, released last week, it has made little progress on this front.

“It’s a question of whether they can get the product orientation itself right,” says Charlie diBona, analyst at Sanford C Bernstein. “There has been a bit of: ‘Build it and they will come.’ That has to change.” By the time Vista recedes into history, Microsoft will have had to build its own Google or Yahoo – or, failing that, have gone out and bought one.

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