Wednesday, January 14, 2009

Why Windows 7 Better Deliver

The economy stinks. PC makers are going wobbly. Time for a change.

BURLINGAME, Calif.--It's been a rotten decade for Microsoft. During the Web boom, it sunk hundreds of millions of dollars into an effort to catch up with Google online. It didn't work. Microsoft was early to the smart-phone game. Yet businessmen and hipsters favor smart phones from Apple and Research In Motion.

So Microsoft (nasdaq: MSFT - news - people ) is getting back to what it does best: putting its Windows operating system onto more computers than anyone else. The release of a beta version of Microsoft's new operating system, Windows 7, has stirred interest amongst the geeky hordes who rejected Vista early on. While Vista was all about flash, Microsoft Chief Executive Steve Ballmer has set just three goals for Windows 7: simplicity, reliability and speed.

"The stakes are high," says Michael Cherry, a senior analyst with Directions on Microsoft. "I'm very comfortable with their approach this time, though, they're almost underselling and over-performing, as opposed to last time, when they over-promised and under-delivered."

Microsoft could use the change-up. Analysts predict that the software giant's total earnings will fall 3.4% to $4.5 billion, or 50 cents a share, for the quarter ended December, compared to $4.7 billion, or 50 cents a share during the year-ago period, according to Thomson Reuters. Total sales are expected to rise to $17.1 billion from $16.4 billion for the year-ago quarter. Microsoft will report earnings Jan. 22.

That's due, in part, to slowing growth for PCs powered by Microsoft Windows software and the mighty kerthunk left by the debut of Windows Vista.

Sales for Microsoft's client unit--which includes Windows--fell slightly to $4.048 billion for the quarter that ended September, from $4.049 billion for the year-ago period. Without a fix, it could get worse, with Canaccord Adams analyst Peter Misek writing in a note to investors this week that more PC makers could start to evaluate alternatives to Windows, such as Apple's (nasdaq: AAPL - news - people ) OS X and Linux.

Windows 7, however, could help turn that around, reigniting Microsoft's growth prospects just as the shift to Windows 3.1 put it on the right track nearly two decades ago. Microsoft had struggled for years to produce a competitive operating system. It wasn't until 1992, with the economy still in the doldrums, that Windows 3.1 got it right, putting Microsoft on top of the market for a new generation of machines that relied on graphical user interfaces.

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