Microsoft layoffs: Is Vista to blame?

In Microsoft's public speeches and press releases, CEO Steve Ballmer has portrayed Windows Vista as nothing short of a wild success, an operating system that has sold millions of copies to adoring fans worldwide.

Alas, reality has finally come into sobering focus: Microsoft's recent earnings report show not just a $900 million revenue shortfall vs. earlier projections, but a serious weakness in one critical part of its business: "Software client revenue" (aka Windows Vista and remnant sales of XP), where sales are down 8 percent vs. last year. In comparison, the company showed growth in some of its other businesses, including the Xbox division (up 3%) and the server business (up a whopping 15%). Also to blame in the poor results: online services (such as Hotmail) and, of course, the Zune, which hemorrhaged $100 million in the last quarter as sales fell off a cliff.

But overall softness aside, all eyes are on Vista, traditionally the source of a massive portion of the company's revenues and profits. The main problem of course is that the sale of Windows is closely tied to the sale of PCs, and with PC sales on the decline due to general economic conditions, sales of Vista have fallen as well. 

That begs the question, though, of what degree the poor reception of Vista has been a driver for said decline in PC sales. Gartner has compared Vista to the embarassment of New Coke, noting that many businesses and individuals -- and probably many of you out there -- are skipping Vista and sticking with Windows XP until Windows 7 comes out. With just a year to go until the new OS, there's really no reason to upgrade now, and that bodes poorly for sales in the year ahead.

Of course, none of this is likely to be comforting to the 5,000 Microsoft employees losing their jobs in what is the company's first major layoff in history.

What will Microsoft do? Soldier on, and finish up the glowingly-previewed Windows 7 as quickly as possible, I'd imagine. What should it do? How about offering free XP downgrades for all Vista users (both new buyers and existing ones) in order to salvage what's shaping up to be a grim 2009.