Microsoft: Not enough XPerienced PCs

While Microsoft is pleased with robust sales of new PCs that come loaded with Windows XP, the company has been less than satisfied with the rate at which large companies are installing its latest operating system.

"In the area of deployment, I don't think that's met my expectations," Kevin Johnson, Microsoft's group vice president for worldwide sales and marketing, told CNET News.com in a recent interview.

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What's new:
Windows XP is shipping out preinstalled on a lot of new computers, but Microsoft is unhappy with corporate reluctance to upgrade existing PCs.

Bottom line:
Microsoft thrives on customers coming along for the upgrade ride. To combat lethargic adoption rates, it plans sell XP's benefits more aggressively.

More stories on the upcoming SP2 upgrade

An executive at one Microsoft customer, computer security firm SecureMethods, explained that there just isn't enough in Windows XP to justify the time and costs of upgrading. Rather than pay for a companywide license to use the latest version of Windows, SecureMethods just takes whatever OS comes installed on new PCs.

"We don't actively upgrade computers," said CTO Paul Clark, adding that PCs have a life of three to four years. "When we buy new laptops, if they come with XP, that's great. We don't buy (new) licenses."

With more than 90 percent of the world's PCs running some form on Windows, Microsoft has long considered its chief competition to be its installed base--convincing customers that they need a new OS can be a tough sell. That's been especially true with XP, which after two-and-a-half years on the market is installed at about 62 percent of businesses with revenue of $50 million or more, according to Jupiter Research.

In addition, a study in December found that 80 percent of companies still have some machines running Windows 95 or Windows 98. And at firms running the older operating systems, an average of 39 percent of desktops were running either Windows 95 or Windows 98, according to technology consultant AssetMetrix.

Even more troubling for Microsoft is the fact that many corporate buyers who already have a license to install XP are remaining on the sidelines. "In the enterprise, it is not a situation where customers don't have license to it," Johnson said.

Microsoft faces a similar issue on the server side, with many of its customers clinging to older versions of the OS. Some analysts estimate that up to 40 percent of servers still run Microsoft's two-generations-old Windows NT 4.

It's not about the money
Even though Microsoft has already collected its revenue from businesses that pay for licenses but don't install the OS, it's still important to the software maker that more customers use its latest products.

"Microsoft doesn't work on the health club model, where they sell memberships and hope people don't use them," said Jupiter Research analyst Michael Gartenberg. "In order to generate success down the road, Microsoft has got to get people to use the licenses they have."

Otherwise, Gartenberg said, companies won't buy the next license, or the one after that.

"Microsoft doesn't work on the health club model, where they sell memberships and hope people don't use them." --Michael Gartenberg, Jupiter Research analyst

That's especially important as Microsoft tries to bring out Longhorn, which the company touts as a significant improvement over XP. Microsoft acknowledged on Friday that it hopes to deliver the software in the first half of 2006, a move it says will require it to scale back its grand ambition for Longhorn.

As for why XP has not received a better reception, Johnson suspects that many customers, like Microsoft itself, have been busy with security issues.

"Customers had to put a lot of their IT focus--and we've made that a priority as well--on how to create a more secure environment," he said.

The story inside large companies contrasts sharply with the strong overall sales of Windows XP, which has benefited from an upturn in the market for new computers. Strong PC sales, for example, helped boost Microsoft to record sales for the quarter that ended in December.

Johnson and Microsoft CEO Steve Ballmer expressed hopes that Windows XP Service Pack 2, a security-focused update set to ship in a few months, will persuade more businesses to make the switch.

"I think it might," Ballmer said. "What we will tell people is, 'Look if you are looking at an upgrade, this should be a thing that puts you over the top.'"

The harder sell
Microsoft is also looking at ways to make customers more aware of the benefits of Windows XP. The company has been considering a variety of ways to "add value to Windows XP" under a plan known as "Windows XP Reloaded."

Windows chief Jim Allchin said the company is looking at a marketing campaign that would tout XP, the service pack and some new additions to the Windows lineup, including updates to both the Tablet PC and Media Center editions of XP, as well as the portable media center devices that will debut later this year. Also under consideration is an update to the version of Windows XP that ships on new computers. The update would add a new version of Windows Media Player, among other enhancements.

Microsoft hopes the campaign does get customers to load XP. Even in cases in which it won't derive additional revenue from the upgrade, Microsoft benefits in a variety of ways when more of its users are on the latest versions of its software. Newer versions typically result in fewer support headaches and higher customer satisfaction, as well as offering better security.

"The irony is that Microsoft has a very good offering (with) Windows XP," Gartenberg said. "It's not a technology issue. It's a marketing challenge, and one they need to address pretty quickly."