Vista sales surging? Not so fast!

When Microsoft released a strong earnings report for the first quarter of 2007, it wasn't just the spike in revenues that was unexpected. The claims that strong Vista sales was a key driver of that earnings growth sounded a bit overblown - and I can give you six reasons why.

The operating system was only released to the consumer market in January. Enterprises have had it since last Fall, but they generally tend to adopt a new Microsoft operating system fairly slowly. Nonetheless, a story in Business Week, Vista Pays off for Microsoft, states that "...while some corporate customers still opt for the predecessor Windows XP when they buy new computers, for software compatibility reasons, a remarkably large number are taking the new operating system." That unattributed remark sounds like a reporter may have drunk too much of the Microsoft Kool-Aid.

Consumers, meanwhile, typically buy an operating system with a new PC. Analysts had been saying that PC sales growth, which had been slowing, was unlikely to see much if any increase from Vista. And Computerworld Windows expert Scot Finnie recently stated that readers of his newsletter for advanced users weren’t too interested in upgrading. Then there was Dell's recent decision to bow to consumer pressure and begin offering Windows XP again as an alternative to Vista. Add it all up and that doesn't exactly support the booming Vista sales theory.

So what's happening? Clearly, the Client division's numbers are up significantly. Windows sales appear to be up. But that doesn’t mean that Vista has hit one out of the park.

Here are six reasons why Microsoft’s spin on the numbers may be less than what it seems:

• A substantial amount of product is still in the channel and not in end users’ hands. “There is a lag between the time an OS ships into the manufacturers, the channels, and retails, and the time it turns into a box and into living rooms and offices, says IDC analyst David Daoud.
• Vista pre sales from the last quarter of 2006 were deferred to be taken in Q1 2007. That accounts for $1.2 billion of the Client group’s $5.2 billion in sales. This includes pre-purchases of the OS as well as machines that were sold with a free upgrade to Vista. Removing those revenues cuts down the quarter over quarter gain for the the Client business unit from 67% to 29%. That’s still quite respectable, but quite a bit lower.
• An accounting change has inflated Windows revenues when compared to previous earnings reports. Until now, when Microsoft reported income from Windows it deferred 25% of the income over a 3 1/2 year period. “The accounting treatment reflected the costs of upgrades and other add-ons Microsoft provides over the life of the system,” according to a WSJ story. With Vista it’s taking the entire amount in the quarter in which it sells the product. In other words, Microsoft’s Windows earnings this quarter would have gone up 25% even if it sold the exact same number of Windows licenses as in the previous quarter for the same price. In a conference call comment picked up by the WSJ, Microsoft’s CFO predicted that this will trend income upward by $220 million for the current fiscal year. Microsoft’s fiscal year for Microsoft ends June 30th so that number represents two quarters of accounting-related income gains.
• A vote for a PC is not necessarily a vote for Vista. Since most enterprises are unlikely to begin a mass migration to Vista, most early users will likely be consumers. Most consumers don’t go out and buy an operating system. It comes on their PC, and PC sales are up by 10.9% worldwide for the first quarter. While PC sales weren’t expected to see a bump from Vista’s release, the reverse may be true. “…yes, there was a small bump from Vista … but we don't think it necessarily translates into a major Vista adoption pattern that drives the market [for PCs],” says IDC’s Bob O'Donnell.
• Corollary: What comes on the box doesn’t necessarily stay on the box. According to various reports in the news, Microsoft claims that three quarters or more of its Windows sales are Vista. When it comes to business users that doesn’t mean much. “A business purchasing new laptops or desktops today is getting Windows Vista... but they typically strip Vista off and re-image with Windows XP so the system fits into their corporate standard,” says IDC analyst Al Gillen.
• Sales revenues aren’t the same as unit sales. Microsoft isn’t necessarily saying it’s selling a lot of copies of Vista. It is saying that with its new price structure it’s making a lot of revenue on the versions it does sell. The company claims to have sold more of the premium editions of Vista, which sell for up to twice the cost of the basic version.

So the tsunami of new Vista users may be more like a small wave.