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The balance sheet on Windows Vista

The OS is chugging along on strong PC sales and antipiracy efforts, but Microsoft still faces some grumbling and a long haul in corporate sales.

Windows Vista has certainly had its fair share of naysayers, but the operating system is clearly finding its way onto lots and lots of PCs.

In last week's earnings announcement, Microsoft reported a 25 percent increase in revenue from the unit that sells Windows for notebook and desktop PCs. Granted, some of that bump came from a crackdown in piracy and because more people are opting for "premium" versions of Vista. Still, the company has now managed to sell 88 million copies of the operating system, a significant tally.

"We have a lot of consumer interest and enthusiasm around it," CEO Steve Ballmer said in an interview with CNET last week.

Vista has picked up momentum in recent months, said Samir Bhavnani, an analyst at Current Analysis West.

"It got off to kind of a rocky start," he said. "There was a very vocal minority of people that were kind of ripping into Vista."

On the corporate side, momentum has been harder to come by. Microsoft finally acknowledged that it won't hit its lofty goal of having Vista in use on twice as many business PCs as were running XP in its first 12 months on the market.

"Yes, there's one or two models you can find someplace in the world of PCs that don't run Windows Vista. But the machines that sell all run Windows Vista."
--Steve Ballmer, CEO, Microsoft

"We think the adoption is pretty much at the rate commensurate with past releases," said Neil Charney, a general manager in Microsoft's Windows Client unit. Charney said that the original goal represented an "enthusiastic assessment" of where Microsoft might be able to get. Analysts at the time said Microsoft's prediction was overly ambitious.

The company said it is seeing some positive signs on the business front, notably a rise in the number of businesses signing long-term deals that cover Windows.

"They wouldn't be signing these agreements if they didn't have the intent to (deploy Vista)," said Mike Nash, vice president of Windows product management.

But while corporations may be planning their Vista move, most large companies that are buying PCs are still immediately reinstalling Windows XP, said IDC analyst Al Gillen.

"That's completely normal behavior," Gillen said, though it has quashed Microsoft's hopes of getting businesses to move more quickly to a new operating system by developing new tools for running compatibility checks and aiding in deployment.

Businesses are "certainly not rushing into it more quickly than they have other Windows (releases)," Gillen said.

Historically, large companies tend to drag their feet on deploying new operating systems, he said, not wanting to be in the leading edge and preferring to wait as bugs and compatibility issues are ironed out. A catalyst for some businesses could be the first service pack update of Vista, due early next year.

Even some consumers and small businesses have been opting for the downgrade path. Dell and other PC makers brought back XP on consumer and small-business machines early in the year, while more recently, some PC makers have made it easier for those buying Vista machines to return to XP.

Ballmer said that while there may be a few PCs still on the market that have XP, it's Vista that consumers are buying.

"Yes, there's one or two models you can find someplace in the world of PCs that don't run Windows Vista," Ballmer said. "But the machines that sell all run Windows Vista."

Still, Microsoft recently bowed to concerns from large PC makers and said they wouldn't have to stop selling XP machines in January, giving them instead until the end of June to sell the operating system.

Clearly, though, those consumers opting to go to Windows XP are in the minority. Vista is now on 95 percent of the desktops on retail shelves and Vista-based laptops represent 91 percent of the models in retail aisles, Charney said, citing numbers from Current Analysis.

Strong Vista sales, whether due to Vista's popularity or just a strong PC market, are nonetheless important to the operating system's future. That's because as Vista's installed base grows, application developers and hardware makers will be more likely to create products that specifically take advantage of the new operating system, which in turn, becomes a further catalyst for sales.

Microsoft isn't mounting a massive ad campaign for Vista this holiday season, but said to expect strong marketing from key partners like Hewlett-Packard. The software maker has also kicked off an online marketing campaign touting the benefits of combining Windows Vista with Microsoft's Windows Live services, the most significant melding of the operating system and online businesses to date.

The software maker is counting on the upcoming holiday season--the industry's biggest selling period--to substantially boost the number of Vista machines out in the world. Apple's Macintosh does represent a formidable competitor for consumer sales, having gained significant market share at Windows' expense in the past year. And while this is the first holiday season for Vista, it's been on shelves for nine months, as compared with Apple's Mac OS X Leopard, which made its debut on Friday.

Microsoft said it isn't deterred by Apple's gains, noting Microsoft's own growth and saying that the overall market is expanding as consumers understand all of the things PCs can do as part of the digital life.

"We're excited and our partners are excited about the opportunity for Windows Vista coming up this holiday," Charney said.

While Apple has gained on Windows over the past year, Bhavnani said the company may find further gains tougher to come by unless it offers a major redesign of its products or comes up with a lower-priced laptop.

But Microsoft may also run into challenges from growing economic uncertainty. Earlier in the year, Bhavnani said he had a more bullish forecast for holiday PC sales.

"Concern about a recession probably weighs on the hearts and minds of some of the consumers," he said. "It's going to be a very good holiday, for notebooks especially. But it's not going to be a great holiday season."