End Runs Around Vista

The ecosystem that Microsoft (MSFT) has built up around its Windows operating system is showing signs of strain. In one of several recent moves by partners that sell or support the company's software, Hewlett-Packard (HPQ), the world's No. 1 PC maker, has quietly assembled a group of engineers to develop software that will let customers bypass certain features of Vista, the latest version of Windows. Employees on a separate skunk works team are even angling to replace Windows with an HP-assembled operating system, say three sources close to the company.

HP acknowledges the first effort. The company formed the "customer experience" group nine months ago and put at its helm Susie Wee, a former director in the company's research labs. Her team is developing touchscreen technology and other software that allows users to circumvent Microsoft's operating system to watch movies or view photos more easily than they can with Vista. "Our customers are looking for insanely simple technology where they don't have to fight with the technology to get the task done," says Phil McKinney, chief technology officer in HP's PC division. After Vista was introduced last year, it drew criticism for slowing down computers and not working smoothly for certain tasks.

McKinney says any discussions about building an operating system to rival Windows are happening below senior-management levels. He doesn't deny some employees may have had such conversations, but he says HP isn't devoting substantial resources to such projects. "Is HP funding a huge R&D team to go off and create an operating system? [That] makes no sense," he says. "For us it's about innovating on top of Vista."

WEANING FROM WINDOWS?

Still, the sources say employees in HP's PC division are exploring the possibility of building a mass-market operating system. HP's software would be based on Linux, the open-source operating system that is already widely available, but it would be simpler and easier for mainstream users, the sources say. The goal may be to make HP less dependent on Windows and to strengthen HP's hand against Apple (AAPL), which has gained market share in recent years by offering easy-to-use computers with its own operating system.

HP's moves come as several of Microsoft's closest partners are stepping up their support for Windows alternatives. Chipmaker Intel (INTC) is promoting Linux for a new class of mini-laptops that use its Atom microprocessor. Dell (DELL) just introduced a mini-laptop that can run Linux and may use the operating system for digital music players, according to one person familiar with the company's plans. "It's an endrun around Windows," says Rob Enderle, president of tech consultant Enderle Group.

Software maker Intuit (INTU) recently scrapped a marketing campaign for its QuickBooks accounting program built around Vista. Intuit originally planned to promote the program's compatibility with Microsoft's operating system but changed course to emphasize the product's low prices. "We had to shift our marketing this year from 'Buy the new version of QuickBooks because it's Vista-compatible,' which did nothing for us," says Intuit CEO Brad Smith. "It wasn't working for Microsoft, and it wasn't working for us." That followed investments in engineering to get the QuickBooks software that ran on the previous version of Windows ready for Vista.

At HP, there are competitive issues driving its software effort. One person who has advised HP executives on strategy says they are concerned that Apple could develop a notebook computer that would sell for less than $1,000. That's a fast-growing market HP depends on for sales where Apple has yet to compete. "Apple is a huge motivating factor," says the source.

SHOES AND CHURROS

Microsoft is working hard to repair Vista's reputation. Executives at the company say the software has been much improved since its release last year, and their biggest challenge is simply getting people to try it. The company just launched a $300 million advertising campaign aimed at persuading computer users to give Vista a chance. The first spot shows comedian Jerry Seinfeld and Microsoft co-founder Bill Gates trading dry asides about shoes and churros.

The effort goes beyond marketing. At a technical conference in October, Microsoft plans to unveil new ways for people to share information among PCs, mobile phones, and the Internet. For example, a worker may be able to start a Power Point presentation from her home computer, store it on the Net, and then pick it up from her office PC. Windows' ubiquity makes the software "very practical," says Bill Veghte, a Microsoft senior vice-president.

Microsoft is trying to strengthen its partner relationships, too. While the next version of Windows, Windows 7, is due out in 2010 or 2011, Microsoft is already sharing technical details with its partners. The idea is to avoid the problems that plagued Vista upon its release. "The level of engagement very early in the process is unprecedented," says Dell CEO Michael S. Dell. "The results will be quite a bit improved from the last time we did this."

Microsoft: What Cost the Vista Fiasco?