Nine burning questions about how Vista is really doing.

May 30, 2007 (Computerworld) -- Four months after its official, belated release, figuring out how Windows Vista is doing in the market involves as much decoding as a  Dan Brown mystery .  Microsoft Corp. may trumpet impressive, McDonald's-esque stats -- 40 million copies  shipped  in 100 days, twice as fast as XP! -- but it politely ducks and weaves when the professionally curious  seek  many of the details behind those numbers.

Instead, there's so much  spin    -- from  Microsoft ,  from rivals such as  Apple Inc .,  from market analysts pushing  research  and  more research  -- it would even leave  Sasha Cohen  dizzy. Here's our attempt to unravel this puzzle-shrinkwrapped-in-a-mystery.

1. Why does Microsoft talk about having shipped 40 million copies of Vista when everyone knows that doesn't equal the actual number of users?

To give Microsoft the benefit of the doubt, 40 million is the only number it can verify, and it's the one Wall Street cares about in any case.

To arrive at that 40 million figure, according to Kevin Kutz, a director in the Windows client division, Microsoft tallied four numbers:

a) all licenses sold to PC makers for pre-installing Vista on their computers;
b) full and upgrade versions of Vista to be sold either as boxed product on retail shelves or at e-tail Web sites;
c) pay-per-downloads, via a new Web site called  Windows MarketPlace , which it runs in partnership with retailers such as  Circuit City ; and
d) customers who redeemed  coupons  issued for free or discounted Vista upgrades if they bought PCs installed with XP between Oct. 26, 2006, and March 15, 2007.

Apart from d) and its direct sales to businesses (both of which we'll get to later), Microsoft relies heavily on its ecosystem of channel partners to sell its software. That's in contrast to firms such as Oracle Corp., which sells most of its software direct. But as a result, Microsoft counts shipments into the channel -- because they're easier to track, and because its partners are the ones actually paying Microsoft.

Microsoft's Kutz acknowledges that because of the time it takes for Vista to wend its way through the channel into customers' hands -- about one month, according to IDC analyst David Daoud -- its 40 million figure was higher than the actual number of users after 100 days.

2. Hey, doesn't Microsoft also sell Vista directly to some big customers, too?

Yes, indeed. Microsoft does sell a lot of software straight to large enterprises and governments, though it declines to reveal how much. Moreover, those customers were actually  allowed  to start buying Vista on Nov. 30, two months before its official launch.

However, Microsoft is actually excluding all of those sales from its ongoing Vista license count. Why? Because despite announced  reforms  to its volume license policies, Microsoft has been  slow  to roll out some of the corresponding back-end technology. As a result, it still can't get an accurate count of volume licenses. In any case, enterprise adoption of Vista appears to be slow among  enterprises  and  governments .

Big organizations are generally slow to upgrade to new versions of Windows because of software compatibility problems, retraining and other management headaches. Of the six million PCs sold to large U.S. enterprises in the first quarter, only a million came with Vista, says IDC's Daoud. And a huge percentage of those million PCs were immediately wiped clean of Vista and re-installed with XP. The pricey contracts these customers hold with Microsoft allow them to re-install Vista later, when they are ready to upgrade.

3. But what about the Vista Express Upgrade program? Didn't that essentially give Microsoft a three-month head start on selling Vista? And doesn't that undermine Microsoft's claim to be doubling XP's shipment rate?

Yes and no. On the head start issue, Microsoft's excuses boil down to two: first, that customers couldn't receive their copies of Vista until after the official launch date (with many  complaining  that they had to wait much longer after that);  second, that the total number of customers that actually redeemed the upgrade coupons was small.

How many redeemed the coupons? Kutz won't say. But according to Microsoft's earnings statements, Microsoft deferred about $1.2 billion in revenue from its fiscal Q2 (Oct-Dec '06) to its Q3 to account for two things: shipping Vista to hardware makers or retailers in late 2006, so they could install it on PCs or stock their shelves in time for the Jan. 30 launch; and "technology guarantees" to consumers, aka the Vista Express Upgrade program.

Microsoft insists that the portion of the $1.2 billion that came from Vista Express upgrades was tiny, though, in lieu of an actual number, we'll have take Redmond's word for it.

As for whether the upgrade program negates an apples-to-apples comparison with XP, it actually turns out that Microsoft  did also grant upgrade coupons to buyers of PCs in the months immediately  before  XP's late 2001 release, to appease partners worried that PC sales would plummet.

4. Still, how meaningful is it for Microsoft to boast about Vista shipping twice as fast as XP if the PC market is also nearly twice the size?

On one hand, Microsoft is clearly shipping more operating systems this time around. That translates to higher sales and profits. Microsoft's operating system revenue between October 2006 and the end of March this year -- the quarter when it began shipping Vista and pre-selling it to consumers, and the quarter of its official release -- was $7.86 billion. That is 72% higher than its revenue in the same quarters around XP's launch, $4.57 billion.

Microsoft's profit from selling operating systems the last two quarters was also staggering: $6.1 billion, or nearly 80 cents for every dollar earned (Microsoft did not break out profit figures by product line in 2001).

On the other hand, as observers have pointed out, Vista  should be shipping faster than XP. The PC market is about 72%  larger  than during XP's launch (58.9 million PCs shipped worldwide in Q1 2007, versus 34.2 million PCs shipped in Q4 2001).

Similarly, the total installed base of PCs today is also 47% bigger (1 billion versus 680 million, according to IDC). By those measures, Vista needs to ship between 50-75% faster than XP just to match the latter's ‘penetration rate,'  argue  some.

Moreover, while Windows XP is now widely considered to be Microsoft's most successful OS ever, it actually started off as one of its weakest. Launched in October 2001, when many countries were still recovering from the dot-com crash, XP didn't provide a lift to PC sales. U.S. PC sales actually fell 10% year-over-year for the quarter in which XP was launched. Customers were also fatigued: Windows ME was released just a year earlier, in September 2000, and Windows 2000 launched in February of that year.

Jupiter Research's  Michael Gartenberg   says he's far from blown away by Vista's uptake rate. "What we're seeing is normal demand," he said.

Still, absent a better alternative, Microsoft's comparison is a "reasonable" one, Gartenberg said. After all, "When people list the highest-grossing motion pictures of all time, do they take into account the fact that ticket prices are much higher today?"

5. Is there any evidence that Microsoft is using less legitimate means to boost shipments of Vista?

You mean like  channel stuffing ? The practice of arm-twisting partners into taking more products than they need or can sell is as old as the manufacturer-distributor relationship itself. While it can create a short-term boost in shipments, true channel stuffing usually ends up hurting all partners, with lower profits, management headaches and plummeting stock prices for all.

At least one blogger  argues  that Microsoft is doing this -- but with its Xbox 360 console, not Vista. Microsoft's Kutz strongly denies any such hanky-panky with Vista, though he declined to elaborate.

"One thing we never talk about is our relationship with OEMs. That gets to remain confidential," he said.

That leaves conspiracy theorists and anti-Softies some ammo. But analysts say they haven't seen anything to indicate this. "It's not even worthy of discussion," said Gartenberg.

"I just haven't heard of any special deals," said Ian Lao, an analyst with  In-Stat . Lao says that his research -- which includes checking inventory levels at firms in different levels of the supply chain -- has not turned up any unusual buildup of Vista software or licenses among distributors or PC manufacturers.

He points out there are strong financial reasons discouraging OEMs and distributors from buying up Vista licenses and "hoarding" them for future shipments. Besides playing havoc with their cash flow, it could also expose those firms to taxes for any long-held inventory.

"It's like buying an extra 100,000 hard drives and having them sit around in your warehouse for a long time," Lao said. "It's very bad for your accounting."

6. So is there any way to figure out how many people are really using Vista today?

Nobody has officially stepped up to the plate, so we decided to do some fiddling on Excel. Take IDC's estimate of 1 billion PCs in use worldwide today, and multiply that with research from Net Applications Inc. showing that 3.74% of PCs connecting to the Internet run Vista. That's based on a sample of 600,000 Web sites and is the most up-to-date number available, according to analyst Vince Vizzacarro.

The rough result? About 37.4 million Vista users worldwide after about 120 days -- not far off Microsoft's figure of 40 million shipments in 100 days.

And how scientifically valid is that number? In-Stat 's Lao says while it "may make some statisticians cringe, it is not a bad starting point." IDC's Daoud goes further, saying this back-of-the-napkin calculation "points to Microsoft's numbers being legitimate."

7. OK, but is Vista going to help PC sales in the long run?

It's unclear. IDC analyst Loren Loverde, citing Q1 '07 PC sales that were up 10.9% year-over-year, has  said  he believes Vista will be a major factor in helping the PC market continue growing at double-digit rates for the next two years.

But Lao  believes  the lift is the result of pent-up consumer demand for Vista, and as a result will last only until the middle of the summer.  Vista might be a "nice new operating system with good features," he said, but overall it is not proving to be a "demand creator" for PC buyers.

8. Is Vista being threatened by Mac OS X or Linux?

Yes and no. The most recent  figures  by Gartner Inc. show Mac sales in the first quarter up 30% year-over-year, outpacing all other vendors. Macs accounted for 5% of the PCs sold in the United States.

Macs also make up about 6% of U.S. computers connected to the Internet, according to WebSideStory Inc. "Mac has almost doubled," a WebSideStory analyst  told  Computerworld in early May, "so you know they're selling a butt load."

Linux is also gaining mindshare on the desktop, after Novell's high-profile  launch  of Suse Linux Enterprise Desktop (SLED) last year. And Dell Inc. has recently started to  sell  Ubuntu Linux PCs. At the same time, Linux's worldwide share of installed PCs remains about 2%, with IDC's Al Gillen  expecting  it to reach just 2.8% by 2009. 

Similarly, while analysts expect the October release of "Leopard" to continue  boosting  the Mac OS X platform, even the most  bullish  predictions  only have the Mac  grabbing  about 5% of the worldwide PC market by 2010.

Though many consumers are conspicuously choosing Mac or Linux over Windows, the bulk of PCs are purchased invisibly, by businesses. The more PCs they buy, the more likely they are to be Windows loyalists. And while leading voices such as Gartner  argue  that the rapid "consumerization of IT"  is making enterprises buy more like consumers, even Gartner is  not predicting  that Macs will sweep into enterprises anytime soon. 

9. So where is Vista's fate most uncertain? What's Microsoft's next move?

Microsoft almost certainly employs a team of economists whose sole task is to create complex models of Redmond's revenues and profits. But the answer to the question's really not that complicated.

Microsoft needs to do two basic things. First, the company has to persuade both consumers and businesses to upgrade to Vista from XP as soon as possible. That makes it easier for Microsoft to sell them related products such as Office 2007, Exchange 2007, Longhorn Server and so on.

Once that's accomplished, Microsoft needs to get consumers and small businesses to upgrade to more expensive ‘premium' versions of Vista -- preferably  Vista Ultimate , though Vista Home Premium and Vista Business (for small businesses) are also good (big businesses are steered to the equally pricey Vista Enterprise edition).

As to the first task, Gartenberg isn't sure that's going to happen. Not only is Microsoft not doing enough to market Vista to buyers, it's not doing enough to woo its ecosystem, either.

"There's no real set of compelling Vista-only apps yet. And the Vista hardware is not really differentiated from XP," he said.

On the second task, early reports are more promising. According to Chris Swenson, an analyst with NPD Group Inc., demand for pricier versions of Vista is strong, especially among those buying copies of Vista in stores. That means higher average selling prices compared with XP -- and meatier profit margins for Microsoft.

"The challenge going forward, of course, is to convince OEMs that they can succeed at selling higher-priced PCs using a higher-end version of Vista to more affluent customers," he said.

But unlike with XP, where a customer is locked into the version -- either Home or Professional -- that he originally purchased, Microsoft is letting customers  upgrade  their version of Vista anytime  via the Internet with a click of a button. Those upgrades -- which range from $79 to $199 -- mean that even if most consumers opt for new PCs installed with the lowest-end Vista Home Basic version, Microsoft still has many more chances to upsell them, sales that would be pure profit for Redmond.