The Vista Sales Numbers: Anatomy of a Wash

The abundant mix of both upward and downward slopes that have characterized Microsoft Windows Vista sales projections since last September, and the strangely dichotomous co-existence of expectations exceeded and fears realized, has led many experts to start asking serious questions about the role the operating system plays not only in the markets but in our lives: Has Windows evolved out of its shell as a consumer product, into the homogeneous commodity that Microsoft simultaneously hoped and feared it might become?

In other words, does Vista really matter?

Last Friday, BetaNews received word of preliminary numbers from an upcoming NPD report that seemed to sound some alarm bells -- at least we thought we heard them -- pointing to Vista retail sales that were 58.9% lower during its initial week than for sales of Windows XP during its initial week. But when we applied those numbers to previous volume sales figures from NPD, the numbers seemed impossibly bad, as though Vista sales were only one-fourth of what they were six years earlier.

In the back of our minds, we were saying, "This can't be," and NPD came back to us to say, "You're right; it can't." What we learned about the shifting economic landscape, and why "58.9% lower" wasn't lower than what we thought it was lower than, became one of the subjects of San Jose Mercury News reporter John Murrell's Good Morning Silicon Valley blog entry that day. There, Murrell cited a quote from Microsoft CEO Steve Ballmer making the rounds, which tempered his earlier rosy sales projections: "[Vista] is primarily a chance to sustain what [Windows] revenue we have," said Ballmer. "Not every release is a revenue growing opportunity."

A later attempt by Ballmer to explain why things look rosy on one side and abysmal on the other, ended up confusing analysts so much that they prompted an unusual short-term selloff in Microsoft stock this morning.

Correctly estimating BetaNews' situation last week as "up to its waist in apples and oranges," Murrell's observations point to an increasingly evident truth: The world to which Vista has awakened in 2007 is significantly different than the one which greeted XP in 2001.

More businesses are purchasing Windows through a volume licensing program, which reduces the number of small businesspeople picking up copies at their local retailer. And Internet downloading is becoming more prevalent among everyday consumers. A good part of the reason there are fewer Vista retail customers is because the market has moved to other sales options.

There are other reasons, as Chris Swenson -- NPD's director of software industry analysis and the lead author of last week's preliminary numbers -- told BetaNews.

"Vista unit shipments were down 59%, but Microsoft gets approximately 80% of their OS revenue from the OEMs - PC manufacturers," Swenson reported. "So it's really important to focus on them predominantly when you're trying to figure out how well an operating system release is going to do; and when you look at that 2007 launch week versus the same week in 2006, PC unit shipments were up 67% year-over-year." Those numbers were provided by Swenson's NPD colleague, Steve Baker.

"Long story short, that is such a great number that it counterbalances the negative growth that we're seeing in the shrink-wrapped box [segment]," Swenson added. "And if you think about it, if there is a 'Vista effect' - if there is a bump in PC shipments that will result from Vista - there has to be a corresponding negative Vista effect for the shrink-wrapped box [segment]."

So already NPD has a clear reason for lower Vista sales figures being reported by its current list of participating retailers: A great many of those customers are still getting their Vista elsewhere. The channels are just different now.

"The reason why I think that is," Swenson continued, "is because at least with this release, the hardware requirements are so stringent that this dual trend - an increase in PCs and a decrease in shrink-wrapped box - might be an indicator that more consumers are going to opt to get Vista through a new PC versus upgrading an older machine." He cited reviews from sources such as the Wall Street Journal's Walt Mossberg, who noted some Vista features performing slowly on a new Dell XPS laptop.

So are we seeing a situation where the retail channel NPD has been tracking for years, and whose evolution NPD admits caused generational shifts that make six-year spans of comparisons implausible, if not impossible, is less pertinent to the overall picture?

"I think that's true to a degree," Chris Swenson responded cautiously. "We've seen digital downloads have more of an impact on the game side than on the non-game side, especially for key applications. If it's for a small utility, an IM program, Skype, people don't mind downloading a little thing and then running it; they do that all the time. For an office suite, for an operating system, oftentimes you see consumers wanting to get that CD or DVD as a backup, in case their machine blows up."

E-commerce, Swenson said, is a much larger percentage of NPD's sample than it ever was, and Amazon is a major player in its current sales figures, where it was much less of one in 2001. Microsoft itself, he said, can fuzzify the picture of e-commerce sales in two directions: first, by generating Internet consumer interest in Vista and then link that consumer directly to Amazon and other retailers; and in the opposite regard, the company's Test Drive program for trial downloads has been, in NPD's view, extremely successful, driving revenue directly to Microsoft and away from the Amazons, NewEggs, and other e-commerce retailers it covers.

Not to mention all the conventional retailers NPD covers, such as Circuit City and Best Buy, who operate their own Web storefronts, and who report their offline and online sales to NPD.

Next: Is Vista the last "new version of Windows?"