A Year of Change Ahead for Microsoft in 2009

For Microsoft, in many respects, 2009 promises to be much like 2008. The company has all the same challenges it exited 2008 with – lingering legal issues, efforts to test and ship the latest version of Windows, and the continued development and evolution of its "cloud computing" plans. Did we mention the down economy?

'Vista Capable' or 'Vista Culpable?'
If CEO Steve Ballmer had thought the company could put the majority of its legal entanglements behind it in 2008, he was wrong.

Lawsuits and legal tussles will continue to plague Microsoft in the new year – most notably the so-called "Vista Capable" lawsuit that's currently slated to go to trial on April 13.

The case is built on the question of whether Microsoft's promotion of less powerful PCs as "capable" of running Windows Vista before Vista shipped in 2007 was actually a deceptive business practice meant to spur holiday computer sales in 2006, even though those PCs could only run the simplest edition of Vista.

Since many of those PCs could only run Vista Home Basic edition, they could not display Vista's new Aero Glass user interface. The plaintiffs insist Aero Glass is a major feature of Vista, and therefore insist that customers who bought PCs thinking they were truly "Vista capable" had been tricked because without the graphics it wasn't really Vista. Microsoft's lawyers, of course, strongly disagree.

Although discovery ended in late 2008, additional phases of the trial, such as motions, could draw it out further into 2009 or even later. Additionally, if Microsoft loses the class action suit, appeals could drag out well beyond the useful lives of those "Vista incapable" PCs.

Buddy, Can You Spare a Dime?
In one respect, 2009 will be unlike any previous year for the company as it – and the rest of the technology industry – has to cope with staying on track in what is arguably the worst down economy since the Microsoft's founding 33 years ago.

One guarantee is that, while executives insist the company is still growing in revenues, in building new infrastructure, and in headcount, those plans have been growing more slowly than before the recession.

At Microsoft's annual meeting in late November, executives told shareholders that, while it will cut budgets across the board, the company will continue hiring albeit at a "much" reduced rated. The latter statement may belie an earlier rumor of a hiring freeze. Microsoft will also continue to invest in research and development, even if at a decreased rate.

Additionally, executives said they had already reduced operational expenses by $500 million.

Officials said in October, during the company's conference call with financial analysts for its first fiscal quarter of 2009, that they are slowing the growth of capital spending, particularly in the area of datacenters needed to support Microsoft's future cloud computing plans.

In addition, the company tried to scale back shareholders' expectations when it reported its fiscal first quarter 2009 earnings in late October. At that point, officials downsized fiscal 2009 revenue guidance from between $67.3 and $68.1 billion – its guidance in late July -- to between $64.9 and $66.4 billion. That's a decrease in anticipated revenues during fiscal 2009 of $1.7 to $2.4 billion.

While the company lowered its growth predictions for the current year, however, it continued – at least as late as the annual meeting in November – to predict year over year growth. In fiscal 2008, it grossed $60.4 billion. That's a slowdown from the 18 percent year over year growth it reported for fiscal 2007, but in these tough times, the 7 percent growth that the company's financial planners predicted in October still seems bullish.

One positive for Microsoft – the company still has $25 billion in the bank – enough to bail out the Big Three automakers on its own in the unlikely event it wanted to.

Microsoft is likely to pull in its bullish horns as the new year progresses, however, as more IT shops fall under the budget axe. Indeed, a recent independently-funded survey found that 46 percent of IT shops are planning on sticking with Windows XP for now and then migrating directly to Windows 7.

Given that Windows 7 will not be for sale until at the very least the second half of calendar 2009 – which coincides with the first half of Microsoft's 2010 fiscal year – it is likely that the company won't see major revenue from Vista's replacement until at least the holiday sales period.

Worst case, shipment of Windows 7 could slip to the first calendar quarter of 2010, which Microsoft has said might happen. Although that is not expected to happen again – as it did with Vista – it's still in the realm of possibility.

If that occurred, it could leave many IT shops in a bad spot without a 'plan B,' particularly shops that are skipping Vista to go straight from XP to Windows 7. Part of their motivation is the age-old need to stretch budget dollars but this time in an abysmal economy.

"Without a specific or compelling business reason to migrate in this bearish economy the majority of corporations will opt to conserve their already constrained IT capital expenditure monies," Laura DiDio, principal analyst at Information Technology Intelligence Corp. (ITIC) and author of the survey report, told InternetNews.com in an e-mail.

In fact, she said, only 16 percent of IT shops will get a budget increase, and many of those will be what she categorized as "modest" increases. Meantime, 27 percent of firms said their budgets would shrink.

Microsoft at Your Service
At the same time, Microsoft also has to somehow maintain the relevance of full-function PCs and laptops, and to continue working to transition much, if not most, of its market to services that run on PCs, mobile devices, and the Web. Those are what executives call the three legs of Microsoft's services stool.

For the past three years, Microsoft has been banging the drum for its version of "software-as-a-service" – which it refers to instead as "software-plus-services." That subtle difference aims to help the software titan maintain its traditional revenue streams from sales of software, while moving towards a services-based revenue model.

The idea is to make a serious move into online applications and services that compliment each other as well as tie in with the company's evolving PC-based software.

Often referred to as Microsoft's cloud computing initiative, it is a grand strategy to offer a wide range of services, ranging from IT products like hosted versions of Exchange, SharePoint Services, and SQL Server Data Services to consumer services like ad supported free e-mail and other services such as free online storage, online photo management and calendaring. That includes Windows Live Search as well.

It also includes scaled down, Web-based versions of its Office applications suite that can be run online via Internet Explorer, Firefox, or Safari browsers. Dubbed Office Web, those applications do not have a delivery date yet.

Another key component of Microsoft's cloud computing play is the Windows Azure cloud services development platform, announced at the company's Professional Developers Conference in October. That is meant to provide a common underpinning for much of the cloud computing services.

Finally, Microsoft also debuted its Live Mesh services in 2008. Live Mesh is a cloud service that aims to link together all of a user's devices, contacts, and content in "the cloud" so that the user's information – whether files or music – is available wherever the user is, on whatever device the user has available at the time. It went into public beta this fall and is expected to ship sometime in 2009.