Reality Check for Vista - TheStreet

Reality Check for Vista

Microsoft CEO Steve Ballmer says there's been overexcitement over the new Windows version.
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Updated from 6:03 p.m. EST

Microsoft

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CEO Steve Ballmer threw a bit of cold water on expectations that the new version of Windows will cause revenue to skyrocket in the near future.

"We're driving it

Vista hard, but some people have gotten a little over-excited," he told analysts at a meeting in New York late Thursday. He clearly sees major revenue gains flowing from Vista and the new version of Office, but his view of the timing is apparently a bit more conservative than that of a number of analysts.

Ballmer was by no means bearish during his presentation, and he relieved Wall Street of one major worry, saying that Microsoft will slow spending growth in fiscal 2008. The software giant ratcheted spending by $2.7 billion in 2007; spending in 2008, he said, "will be somewhat less, not extremely less."

Ballmer also gave a nod to his major competitors, saying that

Google

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has made it somewhat more difficult to hire and retain top talent, and that open source software poses a threat to margins. "Having a competitor who nominally appears to sell for free is always a challenge," he said.

The news put a small dent in Microsoft stock after hours; shares were off 33 cents, or 1.1% to $29.13 in extended trading.

Meanwhile, it appears that retail sales of Vista were noticeably slower in the week it launched than sales of its predecessor -- Windows XP -- were in its first week of release in 2001.

A survey of retailers by NPD, a market research group, found when comparing the "launch week" sales of Windows Vista to launch week sales of Windows XP, unit shipments decreased 58.9%, and dollars decreased 32.1%.

One possible reason cited by NPD analyst Chris Swenson: Consumers have gotten the message that hardware requirements for Vista are rather steep, leading them to defer purchases until they are ready to buy a new, more robust PC.

However, Swenson noted that the average selling price of Windows increased 65.5% to $207.13 and more than 30% of the unit shipments in the retail channel were the more expensive "Ultimate" version of Vista. "So, although total dollars were down compared to XP, I think the preliminary data shows that Microsoft's gamble on a new high-end Vista

version will help keep dollar volumes from declining as rapidly as unit volumes in the near term," he said in a research note.

Ballmer also said Microsoft did not plan any major strategy shifts in how it returns cash to shareholders through buybacks and dividends.

He said the company is willing to spend money to acquire online customers as it battles for share against Google and

Yahoo!

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He does not foresee R&D declining as a percentage of gross margin -- currently at about 17% -- any time soon.