Can Vista Be Credited With Microsoft's Stellar Q1 Gains?
How much will the eventual release of Vista Service Pack 1 help consumers' and businesses' adoption of the operating system, given the fact that Microsoft's existing annuity customers have, in effect, already signed onto it? Would that 75% premium number CFO Chris Liddell cited, for instance, be boosted to closer to 85%? After an analyst pressed Liddell on this point, he conceded the growth would really not be much.
"We believe we can continue to drive that at over 70%, but it's too early to predict anything higher than that," said Liddell. "[SP1] might help, but those rates - 70% - are very high," he said, "so it might assist but it may simply just help us continue at that sort of rate. We're not picking a particular pickup as a result of that alone."
The underlying message is this: The adoption rate of Vista isn't high because customers want it so much as they expect it. Fewer OEMs are purchasing the lesser-valued product in the mix, and more and more of the remaining customers have paid in advance for Vista and its subsequent upgrades.
"You have to realize that the structure of our business really has matured significantly to one that's driven much more around multi-year expectations," Liddell explained to a Bank of America analyst. "To the extent we're seeing strength in annuity agreements now, it's in anticipation of those products. The fact those products launch won't in itself drive an enormous amount of accounting activity; we'll see that over a slow burn. It's the same phenomenon we talked about with Vista; these things will happen over time as people adapt and adopt the particular systems, but from a revenue and economic point of view, our relationship with our customers, our ability to continue to sign them up and drive growth is much more of a multi-period rather than a single event-based phenomenon. And we just think a continuation of very strong products rolling out continuously, quarter after quarter, year after year, is the best way of driving that business."
Taken to its ultimate conclusion, this strategy could have a transformational impact on the way Microsoft has typically done business. In the Business Division, whose revenue from annuities is much higher than for the Client Division, and where the Office suite is the crown jewel, we're already seeing a transformation of the product from a virtual box full of parts like Word and Excel and PowerPoint, to a subscription service whose buildouts and even whose software sources (physical media vs. online) are tailored to fit individual customers.
That transformation is obviously driven by annuity customers, whose expectations for the products to which they subscribe are more regular, more predictable, more cyclical, and in a way less contingent upon periodic overhauls. So while the "Office 13" project has reportedly already been triggered inside the company, the ratio of the need for a next big overhaul versus the need for periodic upgrades has shifted toward the latter.
With more Vista customers moving to annuity agreements and more OEMs demanding that software buildouts be tailored to their own marketing plans rather than having to adjust their plans to suit Microsoft's -- a situation which blew up in computer vendors' faces after the March 2006 Vista delay -- Windows could conceivably become more and more commoditized, based more on the business model of the energy industry than the automotive industry.
The upside of that transition could be this: Whether customers embrace Vista or Vista SP1 or whatever comes next won't be nearly as important to Microsoft as whether they purchase it. They won't have to like it; they might not even have to want it. As long as they subscribe to it, they'll need it, and need it now.
If Microsoft truly does complete its transformation to this business model, it may no longer be possible to think of it as the behemoth served by the helpless minions who pay penance to it by buying its boxes from the shelves. To borrow a phrase uttered by one of the more famous part-time Borg drones, Microsoft would adapt to service us.