Low expectations and Windows 7

If the key to happiness is low expectations, then Microsoft’s customers and investors have it in spades. Most of the software giant’s users simply skipped the company’s last big operating system launch, Vista. And its shares have spent a decade in purgatory.

Yet Microsoft has made progress on a variety of fronts. It has gained market share with its new search engine, Bing; it got the better side of its partnership with Yahoo; and it even appears close to settling nagging European Union antitrust problems. Now it’s preparing to roll out its new operating system, Windows 7. Given Microsoft’s recent track record, turning the release into even a mild hit would offer a pleasant surprise.
The new operating system appears much better than Vista, even if its advertising is unremittingly clunky (a video for enthusiasts interested in hosting Windows 7 launch parties has provoked unexpected mirth on YouTube). Windows 7 is faster to start up from hibernation and less prone to unexpected delays.

However, global sales of PCs, a big driver of operating system sales, are expected to slump about 1 percent this year, according to IDC, a market research firm. Even Microsoft’s ever-ebullient boss, Steve Ballmer, has said the impact of Windows 7 on PC sales “won’t be huge.” As a result, Wall Street expects Microsoft to post flat revenue for the fiscal year ending June 2010.

Yet consider this. There are more than 1.2 billion PCs worldwide. Of these, analysts estimate just one-fifth use Vista. For every 2 percent of those that upgrade to Windows 7 without buying new machines, Microsoft would reap about $500 million in additional revenue, according to estimates from Deutsche Bank. Moreover, about four-fifths of PCs use Windows XP, introduced eight years ago, or older operating systems.

Once companies become comfortable with the new system, many will want new machines, if only because the average PC is currently more than six years old, which is a record.

Yet investors seem indifferent. In the last year, Microsoft stock has essentially tracked the Standard & Poor’s 500-stock index. It trades at 15 times estimated earnings for the fiscal year ending in June 2010, a slight discount to the overall market.

At worst the company’s solid finances — $25 billion of cash and about $18 billion of free cash flow over the next 12 months — provide lots of support should Windows 7 perform as did its lackluster predecessor. But should it take off, Microsoft’s stock could, too.

The New York Times

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