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Wednesday, August 23, 2006

Microsoft Vista Discounts: Bad For Business

Stocks: (MSFT)(DELL)(HPQ)(GTW)

There were rumors several weeks ago that Microsoft would offer discounts to anyone who bought a computer after Thanksgiving of this year so that they could upgrade to the new Vista OS when it comes out in 2007.

Now, The Wall Street Journal reports that Microsoft is once again looking at vouchers for people to upgrade if they buy a computer between now and the Vista launch. Computer retailers are worried that customers will simple wait for Vista before they buy new computuers, foregoing the upgrade discount altogether. Dell, Gateway, HP and others have to be sweating now that there already weak sales could be slammed again over the 2006 holidays.

Microsoft has some substantial risk here as well. It has disappointed the computing public by pushing Vista back in the spring.

At a recent analyst dog-and-pony show, Microsoft said that it thought that Vista would account for $14.3 and $14.5 billion during the company's fiscal 2007. Any further delay, or deep discounts for upgrades could put hundreds of million of dollars at risk, at least during Microsoft's upcoming year.

Microsoft has had a small rally over the last couple of months. It has risen from $21.46 to $25.55 since early June. A 19% rise is a big move for a company with a $257 billion market cap. The rise has been fueled by statements at the big software company that they now understand that the internet has to be a big part of their software distribution business and that other products like Xbox are doing better.

But, Microsoft's OS business is where it makes it operating margins. And, a delay in Vista, or a perception that discounts for upgrade might hurt revenue could send the stock back toward $21.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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