Window on the Future

Microsoft CEO Steve Ballmer is using every available resource, including his teenage son, to ensure that Windows 7 isn't another Vista.

Microsoft Corp. Chief Executive Officer Steve Ballmer says the company got the wrong impression from early positive feedback on Vista and won't make the same mistake with the software's successor, Windows 7.

Ballmer has established a process for gathering feedback from computer makers, and he's personally surveying customers — along with his teenage son — to make sure Windows 7 works. Early users, including Continental Airlines Inc., Starwood Hotels & Resorts Worldwide Inc. and the city of Miami, say they are upbeat about the software.

“The test feedback has been good, but the test feedback on Vista was good,” Ballmer, 53, said in an interview last week. “I am optimistic, but the proof will be in the pudding.”

Ballmer needs a winner. Before today, Microsoft had dropped 54% on the Nasdaq since he took over as CEO in 2000. For most of the past year, Ballmer ran the Windows business himself, and he's counting on Windows 7 to restore investor confidence after corporations and consumers snubbed Vista. About 80% of companies plan to switch to the software in the next two years, ISI Group, a brokerage firm in New York, says.

“Windows 7 is important for how Microsoft is seen in the marketplace, especially after how Vista was received,” says Ken Allen, a portfolio manager at Baltimore-based T. Rowe Price Group Inc., the seventh-biggest institutional holder of Microsoft shares. “It will be an important year for how Ballmer is viewed as CEO.”

Underestimating?
Wall Street is underestimating the impact of Windows 7, which debuts on Oct. 22, says Sarah Friar, a Goldman Sachs Group Inc. analyst in San Francisco. Analysts' profit estimates for Microsoft, the world's largest software maker, are 3% and 5% too low for 2010 and 2011, she says. The company's Windows sales will increase 9% to $16.3 billion in 2010, the first full year Windows 7 is on sale, compared with a 10% decline this year, she predicts.

“We have big expectations for what Windows 7 can do,” Friar says.

Others remain unimpressed with Windows 7 and Ballmer.

“Ballmer needs to retire — it's been a huge disappointment from a shareholder's perspective,” says Dave Stepherson, a fund manager at Hardesty Capital Management in Baltimore, referring to Ballmer's tenure as CEO. He helps manage $650 million, including Microsoft shares. Windows 7 won't change things because it doesn't have any “must-have” features, he says.

Microsoft advanced 25 cents to $24.89 at 9:48 a.m. New York time in Nasdaq Stock Market trading. Before today, the shares had gained 27% this year. Of the 35 analysts following the Redmond, Washington-based company, 24 suggest buying the stock, 10 say hold and one says sell, according to data compiled by Bloomberg.

Continental and Starwood say Windows 7 runs faster than Vista.

It starts up and shuts down more quickly, and lets users preview the contents of windows by placing their mouse over the entry on the bottom of the screen. It also supports multi-touch navigation, letting users control the software using their fingers.

In the past, companies have typically switched to a new version of Windows when buying new PCs, says Heather Bellini, an analyst at ISI in New York. Because Windows 7 runs on older machines, ISI's survey saw a “significant jump” in companies saying they will put Windows 7 on existing computers.

More responsive
Continental says Microsoft is more responsive to suggestions than it was with Vista, when the airline's proposed features never made it into the software. Windows 7 now offers those options, such as better mobile access to corporate networks, says Eric Craig, managing director of technology at Houston-based Continental, the fourth-largest U.S. carrier.

Because Windows 7 can run on older machines, it's more appealing to budget-conscious customers, Craig says. Continental can use the software on more than 60% of the PCs it already has, he says. Microsoft has developed tools that help customers upgrade operating systems and assess whether their applications will work.

“We're all struggling with the economic reset,” Craig says, adding that Ballmer should get a lot of the credit for focusing on the cost of Windows 7. “He really understands the incredible pressures on us to deliver with what we already have.”

Vista debuted in 2007 — two years behind schedule and more than five years after the previous version, Windows XP. Vowing never to go that long again between releases, Ballmer reshuffled executives. He put Steven Sinofsky, known for sticking to deadlines with Office releases, in charge of Windows development.

Even then, Ballmer says he worried that Windows 7 wouldn't be exciting enough. That changed two summers ago, when he saw a demo of a math feature. Users could handwrite an equation onto a panel, and the software recognized the notation. Ballmer, who went to math camp as a kid, was impressed.

“I said, 'Yep, this product's going to be an exciting product,'” he says.

To gauge the reception to Windows 7, Ballmer is doing his own polling. A test version of the software has been available since January, giving early adopters a chance to try it out.

“He asks everyone he talks to, 'Are they using Windows 7? What are they experiencing?'” says Tami Reller, a Windows vice president. “He's his own market-research firm.”
Ballmer says his toughest critic is his 14-year-old son, who has helped find bugs in the software. He put an early version of Windows 7 on his school laptop about 18 months ago, “probably well before he should have,” Ballmer says.

With Vista, many computer and software makers didn't have compatible products out soon enough. To fix that problem, Ballmer has his lieutenants gather feedback from computer makers in a systematic way and act on it. The new approach has won praise from Hewlett-Packard Co., Dell Inc. and Acer Inc., the three largest personal-computer makers.

“Windows 7 is the first right thing they have done in the recent five years,” J.T. Wang, chairman of Taipei-based Acer, said in an interview in April.

Windows still dominates the market, running more than 90% of PCs. Even so, Apple Inc.'s Macintosh has gained market share since Vista debuted. Apple's share of U.S. PC sales increased to 8% in the fourth quarter of 2008 from 5.1% in 2006, according to Stamford, Connecticut-based Gartner Inc.

Apple rivalry
“We often hear from our customers that they chose Mac because they're tired of the headaches with Windows,” says Bill Evans, a spokesman at Cupertino, Calif.-based Apple. He says many existing Windows users will have a “painful upgrade” to Windows 7, giving them a reason to buy a Mac.

Some customers put off PC purchases altogether after Vista. And makers of netbooks — the cheap laptops that have surged in popularity this year — have opted to use the older Windows XP because it's less expensive and doesn't require powerful hardware. Windows revenue has declined in each of the past three quarters.

Vista's failings, coupled with the recession, may actually help Windows 7, says Loren Loverde, an analyst at Framingham, Massachusetts-based research firm IDC. Corporations are now saddled with aging software and computers, so many may be eager to upgrade.

“We essentially missed an operating system with Vista — very few businesses migrated,” says Mark McBeth, vice president for information technology at Starwood, the third-largest U.S. lodging company. “Microsoft has been very responsive with Windows 7 and we all know why. They've got it right this time, and they want to make sure everybody knows.”

James Osteen, Miami's assistant director of information technology, decided to upgrade his existing PCs to Windows 7 — even though budget cuts may force him to stop buying new machines. He estimates Miami's government offices can save almost $400,000 a year from Windows 7 because it uses less energy and is easier to install.