Reluctance to upgrade starts to hurt Microsoft

Comments like that underscore the need for Microsoft to do more to convince customers, particularly consumers and small-business owners, of the advantages of moving to a more modern operating system, analysts said. "They haven't done a phenomenal job yet of evangelising folks to get on to Windows XP," the most current version of Windows on the desktop, Gartenberg said. "Getting folks on Windows XP really should be the priority at this point."

The company has tried to convince customers to upgrade more regularly, particularly through licensing programs in which customers pay an annual fee to get access to all updates for a particular product. However, analysts have expressed concern that the company's take from licenses -- known as its unearned revenue balance -- has dipped sharply in the last two quarters. Licensing accounts for just over a quarter of Microsoft's revenue.

And if some customers are still clinging to a 6-year-old version of Windows, will they want the new, more complex versions now in development? Microsoft is spending billions of dollars to develop Longhorn, the code name for a new version of Windows expected in 2006.

"I think it depends on the use cases; for the moms and pops that use (Windows) for email, no, or enterprises that keep it around because they run some ancient DOS apps, probably not," said Steve O'Grady, an analyst at research firm RedMonk.

Microsoft argues that the issue of whether or not to support Windows 98 is not a major one for large companies, saying much of its support request for the older operating systems is coming from consumers overseas. Most companies, Microsoft says, upgrade their operating systems within the five-year period during which it offers mainstream support.

However, polls show that Microsoft's older operating systems still enjoy widespread use, both worldwide and at large corporations in the United States. AssetMetrix, a firm that advises companies on software upgrades, said in December that 80 percent of the companies it surveyed had at least one PC running Windows 95 or 98. Of those companies that did have one of the older operating systems, Windows 95 and 98 made up nearly 40 percent of all systems.

Given those numbers, it made sense for Microsoft to extend support, said Steve O'Halloran, managing director of AssetMetrix Research Labs. Squeezed by shrinking information technology budgets, many companies didn't upgrade over the past few years, he said. "The customer was needing support, and Microsoft was gracious enough to throw them a lifeline. It's in everybody's best interest.

"Those old Pentiums -- sub-500MHz machines -- are still in considerable numbers. Until those machines are properly retired, the ability to migrate to an operating system with greater requirements won't happen."