February 2, 2004 4:00 AM PST

Windows plan underscores Microsoft struggle

A move by Microsoft to extend support for an older version of Windows underscores a new reality for the software giant: Convincing customers to upgrade is becoming much more difficult.

Last month, Microsoft backtracked from a decision to end support for Windows 98 and other older Windows versions, pledging to continue support until 2006.

While many customers applauded the move, some analysts said that the decision may be more than an act of goodwill. According to recent surveys, about one-quarter of all PCs run Windows 98 or older versions of Windows. "Better to have people stay on Windows 98 than to start investigating things like Linux," said Michael Gartenberg, an analyst at Jupiter Research.

Microsoft maintains that it was just looking out for customers--mainly in developing markets--when it extended support for Windows 98, Windows 98 Second Edition and Windows ME. Of course, the call for Linux on the desktop has been strongest in emerging markets such as China, as some governments, both foreign and domestic, are actively investigating whether to switch from Windows to other operating systems.

Whatever the company's motives, the move highlights a growing area of concern for Microsoft: How can the software maker persuade existing customers--especially consumers who see their current software as "good enough"--to regularly upgrade? Excluding new hardware sales, the company derives 42 percent of its revenue from one-time software licenses and upgrades.

Microsoft has historically used two methods to move its customers to a new release of Windows or Office: Convince them of the merits of upgrading or cut off support, said Gartenberg. The threat of a support cutoff for Windows 98 undoubtedly got some people to upgrade, but as the deadline neared, Microsoft saw that not everyone was going to make the switch.

"A lot of the marketplace said, 'We're not going to be pushed along," Gartenberg said.

Some consumers have machines that just can't be upgraded to run Windows XP. "We have older hardware and are unwilling to invest at the drop of a hat thousands of dollars to refit the hardware," said Mike Flynn, a software consultant based in the Seattle area.

News.context

What's new:
When Microsoft prolonged support for Windows 98 and other older Windows versions, many customers applauded the move. But some analysts said it wasn't necessarily an act of goodwill.

Bottom line:
Persuading existing customers to upgrade is becoming more and more difficult. As the threat of Linux looms, the software giant needs to convince consumers and small-business owners in particular of the advantages of moving to a more modern operating system.

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Comments like that underscore the need for Microsoft to do more to convince customers, particularly consumers and small-business owners, of the advantages of moving to a more modern operating system, analysts said. "They haven't done a phenomenal job yet of evangelizing folks to get on to Windows XP," the most current version of Windows on the desktop, Gartenberg said. "Getting folks on Windows XP really should be the priority at this point."

The company has tried to convince customers to upgrade more regularly, particularly through licensing programs in which customers pay an annual fee to get access to all updates for a particular product. However, analysts have expressed concern that the company's take from licenses--known as its unearned revenue balance--has dipped sharply in the last two quarters. Licensing accounts for just over a quarter of Microsoft's revenue.

And if some customers are still clinging to a 6-year-old version of Windows, will they want new, more complex versions now in development? Microsoft is spending billions of dollars to develop Longhorn, the code name for a new version of Windows expected in 2006.

"I think it depends on the use cases; for the moms and pops that use (Windows) for e-mail, no, or enterprises that keep it around because they run some ancient DOS apps, probably not," said Steve O'Grady, an analyst at research firm RedMonk.

Microsoft argues that the issue of whether or not to support Windows 98 is not a major one for large companies, saying much of its support request for the older operating systems is coming from consumers overseas. Most companies, Microsoft says, upgrade their operating systems within the five-year period during which it offers mainstream support.

However, polls show that Microsoft's older operating systems still enjoy widespread use, both worldwide and at large corporations in the United States. AssetMetrix, a firm that advises companies on software upgrades, said in December that 80 percent of the companies it surveyed had at least one PC running Windows 95 or 98. Of those companies that did have one of the older operating systems, Windows 95 and 98 made up nearly 40 percent of all systems.

Given those numbers, it made sense for Microsoft to extend support, said Steve O'Halloran, managing director of AssetMetrix Research Labs. Squeezed by shrinking information technology budgets, many companies didn't upgrade over the past few years, he said. "The customer was needing support, and Microsoft was gracious enough to throw them a lifeline. It's in everybody's best interest.

"Those old Pentiums--sub-500MHz machines--are still in considerable numbers. Until those machines are properly retired, the ability to migrate to an operating system with greater requirements won't happen."

The hidden cost
However, while many hailed the decision to extend Windows 98 support as an unambiguous victory for the consumer, others said there is a definite cost to both businesses and consumers who choose to stay with the older software.

Continued support from Microsoft will likely keep Windows 98 machines around longer, which means other software developers will have to support the OS longer, said Ray Vizzone, chief technology officer of Recommended Test Labs. Vizzone, whose company helps software makers determine which operating systems they need to test their products against, said that schools, in particular, won't upgrade until they have to.

"Education tends to stay with older OSes longer," Vizzone said. "Those developing for the education market would like not to test on so many operating systems."

But with Microsoft prolonging support, Vizzone said, Windows 98 is likely to remain fairly prevalent in schools. "As we go back to our clients, we're advising them that Windows 98 really can't be removed from your testing matrix."

Companies will need to spend money to ensure backward compatibility that otherwise could go into developing new features.

Another cost comes in the danger of crying wolf, argued Michael Cherry, an analyst at research firm Directions on Microsoft. "Some customers have gone to management and in good faith said, 'We need to upgrade because support is going to end,'" he said.

With Microsoft's about-face on Windows 98 support, the next time an end-of-life deadline looms, companies may decide to delay their upgrade to see if Microsoft blinks.

"I fully believe Microsoft has a right to set these end-of-life dates," Cherry said. However, he added, they should be more fixed. "This sort of trial balloon lifecycle is just no good for anybody."

Microsoft, for its part, points out that the end-of-life dates are always minimum support commitments, meaning the company could choose to extend support beyond those dates. The company said it has received only positive responses to the change, though a representative said that in the future, if Microsoft has to change its support plans for a product, it will do so earlier.

"I think if we make a change to a support lifecycle we will make those changes sooner in the support lifecycle," said Andy Erlandson, director of product support services for Microsoft. "That's one thing we learned from this go-around."

Linux waiting in the wings
The coming years may represent the best opportunity yet for Linux to make headway against Windows on the desktop, given customers' ambivalence toward upgrading, combined with Microsoft's extended product delivery schedule. The company is not planning a major upgrade to Windows XP until Longhorn arrives, perhaps around 2006. But when it does arrive, Microsoft promises a major advance that could widen the gap between what Windows has to offer versus competing operating systems. "Longhorn--if they can deliver on the vision--will be a very compelling upgrade, I think," RedMonk's O'Grady said.

"That's why Linux has to get established now," he said. "I think the climate is never going to be better for them and is likely to get significantly more difficult" with Longhorn.

On the server side of its operating system business, Microsoft faces a similar challenge. Windows NT 4 Server--long superceded by both Windows 2000 and Windows Server 2003--still accounts for more than a quarter of Windows server installations. Paid support for NT 4 is ending at the end of this year, a fact that Microsoft touts prominently on a special Web site geared toward convincing server customers to upgrade to Windows Server 2003.

The software maker is walking a fine line, as it tries to gently nudge customers away from NT 4.0 without pushing them away from Windows entirely.

Sensing an opportunity, IBM last week launched an effort to try and woo Windows NT users to its Linux-based servers. An executive from Big Blue predicted that the workload from as many as half of the 2 million servers out there could eventually migrate to Linux-based machines.

Microsoft executives acknowledge the looming threat. "Anytime a customer is considering a platform change the field is wide open, not just Linux," said Jim Hebert, a general manager in Microsoft's Windows Server group.

CNET News.com's Mike Ricciuti contributed to this report.

 

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