Analyst Warned Microsoft About Vista, Low-Cost PCs

Daugherty is the in-house market analyst who in early 2006 warned Microsoft's Windows Vista marketing team that the new operating system's "harsher" hardware requirements didn't make a lot of sense in a market that was skewing rapidly towards ultra-low-cost mobile PCs.

Thursday's extension makes Windows XP Home available for Microsoft OEM partners to pre-install a full two years after XP Professional is discontinued. The move is seen as an effort by the Redmond, Wash.-based software giant to stave off Linux in ULCPCs, but also as an admission of sorts that Vista's pricey system requirements aren't well suited to the growing ULCPC market segment.

Daugherty's warnings and the extent to which they apparently fell on deaf ears are part of a large collection of internal Microsoft e-mails that were unsealed by a U.S. district court judge in the ongoing Vista Capable class-action suit in Seattle. The exchange between Daugherty, fellow analyst Tim McDonough and several Windows marketing executives takes place on pgs. 59-67 of the unsealed electronic discovery.

Daugherty, in a Feb. 28, 2006 e-mail to marketing executives Mike Sievert, Rich Thompson, Brad Goldberg and others, asks a serious of tough questions about Vista given "some amazing stats and predictions on home notebooks" (Sievert's replies are in bold):

We all know laptops are growing, but I'm struck by the magnitude, especially in the home (using retail for crude proxy of consumer/home). Retail tracker points to all retail notebook sales for CY 05 in US, Can, Europe totaling 10.49mm units (and desktops almost the same at 10.5mm units).

And I'm especially taken by the fact that sub $1000 laptops are now 50% of the home laptop market, and in Dec 05, accounted for 26% of all retail computers sold

The implications may be (I know I'm missing some of the pieces (e.g. impact SMB purchasing via retail, etc.):

a) Are home laptops flying out the door because they are cheap, and thus might not need/want Premium Vista? [Mike]: I don't see the connection. Home Premium is great for low cost devices.

b) Aren't system requirements for Vista on laptops harsher than today, when XP Home works easily on these low cogs models? [Mike]: yes esp on memory. This true for both home premium and home basic

c) Are our assumptions/predictions on the take rate of Premium too high, because we've missed the impact of the shift to cheap laptops? [Mike]: I don't think so. I don't make the distinction on the appropriateness of home premium based on hardware cost.

d) Should we try to mimic our "premium take rate" success on the home desktop (MCE), and apply to the home laptop? [Mike]: didn't follow this point. Can you restate?

Later on Feb. 28, 2006, Daugherty sends another e-mail reiterating his concerns about Vista and suggesting Microsoft could miss the boat on ULCPCs if they don't build a less costly product:

I may be wrong on the sys requirements, but I believe XP didn't have the same constraints we'll see in Vista AND we've never before had the ultra cheap laptop phenomena going on ... and of course we still don't know actual requirements.

Net: I think even with minimal "premium up-pricing" (I'm being a heretic and almost suggesting another sku or product to nail the home laptop ...) ... there is a few Hundred Million of $ revenue to chase ...

Goldberg, in replying to Daugherty, downplays the analyst's concerns:

3) will system reqs kill this golden goose? -- I don't think so and I'm not sure the solution you would advocate here ... our system reqs for vista are locked, oems basically have made their decisions on what sku to lead with on what hw products, etc. ... we are scaling with new hw and we have made exceptions for ultra mobile laptops in our logo plans ... I think the team has though [sic] this through but if there is a hole here or suggested action let me know

Ultimately, Microsoft's solution to Vista's propensity to "kill the golden goose" of cheap laptops was to go back in time and extend the lifespan of XP.