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Does extension of Windows XP's life mean Vista is a flop?

No, and the financial impact is going to be minimal. Microsoft has just staged a reasonably graceful retreat from its plans to drop Windows XP in January, saying it's "extending availability ... for an additional five months to June 30, 2008".

Putting a gloss on the climbdown, Mike Nash, corporate vice-president, Windows product management, said: "As a practical matter, most of our previous operating system releases were available for about two years after the new version shipped, so maybe we were a little ambitious to think that we would need to make Windows XP available for only a year after the release of Windows Vista."

Microsoft had already reduced its sales forecasts for Vista. In July, chief financial officer Chris Liddell told analysts that Microsoft had tweaked its fiscal 2008 numbers on the assumption that Vista would account for 78% of Windows sales, down from 85%. He didn't say how much this would cost, but the figure for "undelivered elements" was off by $120m (£59m), or $10m a month. This is rather small beer for a Windows division that makes an operating profit of around $1bn a month.

Most Windows sales are made when people buy it preinstalled on a new PC. Financially, it makes little, if any, difference to Microsoft whether it's XP or Vista. The main benefit comes from what Microsoft calls the "OEM premium mix" - how many customers pay extra for XP Pro (£234 on Amazon) instead of XP Home (£176), or Vista Home Premium (£185, or £120 upgrade from XP) instead of Basic (£180, or £80 upgrade).

Microsoft makes a lot more money from premium versions, so the trick is to make the standard version just unattractive enough to stimulate sales of the premium version. Microsoft certainly managed that with Vista. However, it may also have made the standard version too unattractive to people who'd just as soon have XP. Another factor has been the arrival of ultra-low cost but low-spec laptops. These typically don't have the extra memory and fast graphics required to run Vista well. PC manufacturers can't achieve the same low price points with Vista that they can if they ship Windows XP instead.

Vista's stumbles contrast with the success of Microsoft Office 2007. Last month, US analysts at NPD reported that retail sales of Office were up 59.6% compared with the first six months of last year. However, part of that resulted from sales of an older version of Office to Mac users, many of whom could be switching from Windows.

Such "switchers" can be good business. If they buy both Mac Office and a full copy of Windows to run under Parallels, Microsoft can make $500 to $1,000 per head, compared to between $50 and $100 for a bundled PC user. The problem for Microsoft is that it's not a business model with much of a future.

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