Windows Vista delayed; Microsoft stock down

In a move that will have repercussions throughout the personal-computer industry, Microsoft said Tuesday it will delay the broad release of its Windows Vista operating system until January, missing the crucial 2006 holiday retail season.

The move dragged down the stock of Microsoft and other tech companies that are expected to benefit from Vista. Microsoft was the most heavily traded stock on the Nasdaq market this morning, where it fell about 3 percent to $27 as of 11:22 a.m. PC makers Dell and Hewlett-Packard were down 8 cents and 26 cents, while Nvidia, a maker of the graphics cards needed for Vista's new display system, was down $1.67 or 3 percent.

Quality issues forced the company to move its release date back "a few weeks," making it tough for some PC makers to get machines ready for the holidays, said Jim Allchin, co-president of Microsoft's Windows operation.

"We decided to move it out a few weeks, and that put us on what I considered to be a bubble," he said in an interview. "We expected some partners to be able to make it and others not, and because of that we decided not to proceed ahead, and that's why we ended up staggering the availability."

Big business customers will still get the software in November, but consumers, small businesses and others that buy the software at retail and on new PCs will have to wait a bit longer.

Still to be determined is how the delay will shake out within Microsoft and the Windows division. On Tuesday Allchin denied the delay would lead to personnel changes, saying there are "no plans" for changes, but the Wall Street Journal today reported rumors that Senior Vice President Steve Sinofsky is expected to move from Office to Windows shortly.

Several PC makers endorsed the move.

"We strongly support Microsoft's decision to prioritize quality in determining the schedule for Windows Vista," Todd Bradley, executive vice president of Hewlett-Packard's Personal Systems Group, said in a Microsoft news release.

"A January launch of Windows Vista allows us to execute in a consistent way throughout the holidays and will provide the right opportunity for a large, exciting launch industrywide after the New Year," he said.

Gateway was prepared to ship Vista PCs this holiday season, spokesman David Hallisey said. "This allows us to prepare for the holidays in a more orderly fashion, and regardless of the actual timing, our PCs will be fully Vista-ready well in advance of Microsoft's introduction," he said via e-mail.

But some analysts view the delay as something of a blow to the company, as well as its partners. "This is a major slip with material consequences," Rob Enderle, president of San Jose, Calif., researcher Enderle Group, told Bloomberg News. "Missing the fourth quarter will have a significant impact on consumer sales."

There have been warning signs Vista was proceeding slower than expected. Work slowed two years ago when the company shifted a number of engineers to fix security problems in Windows XP and other current products.

Then difficulties with the complex new system forced Microsoft to drop several major features and overhaul its development process.

Test versions of Vista have been trickling out for a year, including one with all the planned features released in February to business customers and software developers.

A "feature complete" test version aimed at the general public was expected next month, but last week a Microsoft manager publicly described it as a May release.

Allchin said Tuesday the public test release will be in the second quarter, which could be as late as June.

After the announcement Tuesday afternoon, Microsoft shares dropped 69 cents in extended trading, to $27.05. Some chip makers saw their stock fall sharply in Asian trading early today as investors anticipated slower PC demand due to Vista's delay.

But even before Tuesday's announcement, Wall Street analysts had been quietly ratcheting down their expectations for Vista to contribute significantly to Microsoft's 2006 sales. Instead they've been looking for sales to pick up in 2007 and beyond.

Even if Microsoft released the software broadly in November, it would take time for PC users to migrate to the new system. Many still use older Windows versions, and businesses tend to wait for bugs to be sorted out before upgrading.

But the announcement may affect Microsoft's efforts in recent weeks to get customers and industry partners excited about its array of new products.

Allchin said the delay results from the need to work more on Vista's quality. "This is the product that's going to last Microsoft and the industry a very long time," he said.

Asked what specifically are the quality issues, Allchin said, "There's a whole set of things. We want to ensure that we have the best experience between usability and security. We want the highest [application] compatibility that we can have. We want the best device coverage that we can have — all of those combined."

Pressed in a conference call with analysts and journalists about what the team is still working on, Allchin said it is ratcheting up some "metrics" to levels higher than before.

"If I had to pick out one aspect, I guess I would lump it into terms of we're trying to crank up the security level higher than ever," he said.

Rick Sherlund, a leading technology analyst at Goldman Sachs, expressed surprise at the delay and asked what the company will be doing in the remaining months. In a research note to clients this morning, Sherlund said the delay should move 2 cents a share from Microsoft's second-quarter sales into its third and fourth quarters, "with no net effect" on the company's full-year earnings.

"While clearly disappointing in pushing out the timing of an important positive catalyst for the stock, the actual earnings impact is relatively small,'' he wrote.

Allchin said all the features in the software are in, and none is expected to be removed or added. "We are going to continue working on all the aspects that we think are of quality," he said. "That means [application] compatibility, performance — security is a big thing."

In the interview, Allchin said Microsoft is not changing the Vista lineup. The operating system will include basic and premium versions for consumers and small businesses, plus an enterprise version for big companies and an "ultimate" version for those desiring all available features.

Allchin said the delay won't affect his plans to retire at the end of 2006, after Vista is done.

"I just said this thing should be completed this year; it's going to be done this year," he said in the conference call.

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com. Seattle Times technology reporter Kim Peterson contributed to this report.