Monday, January 09, 2006


Microsoft Chairman Bill Gates often likes to use the giant Consumer Electronics Show to unveil high-concept gadgets running Windows software.

Gates stepped to the podium in Las Vegas Wednesday night with a higher calling: to pitch Windows itself.

His challenge: to foment buyer anticipation for new PCs equipped with Windows Vista — the latest, most powerful version of the world's most widely used computer operating system. Vista is expected to hit stores late this year.

"2005 was a big year (for Microsoft). 2006 will be an even bigger year, with Vista coming out and Office 12 and the realization of the Media Center PC as a mainstream product," Gates said.

"Windows is Microsoft's most important product, and this is a very big release," Gates told USA TODAY earlier in an interview. "People will see a lot of things that they haven't seen before in terms of media, photos, user interface."

Vista is the linchpin to Microsoft's strategy for breathing life back into its growth rate in a rapidly evolving tech sector — and for reviving investor enthusiasm. Gates hopes to entice consumers to buy powerful new Vista PCs to use as the hub for integrating digital music, movies and video games in their homes as it fends off competition from Google, Apple and others.

From 1995 through 2000, Microsoft revenue, driven by sales of Windows and Office, grew on average 28% a year as consumers and businesses bought new computers and software to keep up with advances in power and sophistication.

But from 2001 to 2005, annual sales growth dropped to about half that. In its last fiscal year, which ended in June, revenue grew just 8% from the previous year.

Not surprisingly, Microsoft shares, which traded around $50 in 1999, have languished below $30 for much of the new millennium. It has become much more difficult for Microsoft to make the case for continual upgrading.

"Lagging sales may be due, at least in part, to many or even most users having all the computing power they need," says Charles King, principal analyst at Pund-IT Research.

Another major factor: Microsoft took five years — the longest stretch in its history — to deliver this Windows upgrade. The main reason: Security woes blindsided it, as hackers and crime groups joined forces to exploit security gaps intrinsic to any Windows PC connected to the Internet. As a wave of Internet-based scams hit, Microsoft scrambled to make security improvements, pulling resources away from Vista's development. With Vista, Microsoft asserts that security is well in hand.

"Security is pretty simple," says Gates. "It's something that because of the innovation in Vista you'll spend a lot less time involved with it, thinking about it, you just won't have to do as much because the software is taking care of that."

But those improvements came at a steep price.

In August 2004, to avoid further delays, the company announced Vista's much-touted graphics and communications engines — Avalon and Indigo, respectively — would be scaled back. Avalon was to smooth the integration of audio and video files; Indigo could make computer-to-computer linkups easier.

Worse, Vista would not include a breakthrough filing system, called WinFS, until later. WinFS was conceived to make it easier to work with and search for files stored in disparate formats, solving a profound Windows bottleneck.

The vacillation left in the lurch hundreds of third-party software developers toiling to create cutting-edge programs to run on Vista, says Paul DeGroot, tech industry analyst at Directions on Microsoft. "Vista is, I hope, the last time that Microsoft labors so long, misses so many ship dates, and revises so many features midstream," DeGroot says.



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