Microsoft's Windows 2000 Conundrum

by Alex Woodie

Just as Microsoft prepares to end mainstream support for Windows 2000 next week, a report surfaces from AssetMetrix, an asset management software provider, that indicates Windows 2000 is still installed on nearly half of corporate desktops. The discrepancy between what is being used, and what Microsoft is paying to develop and support, highlights the challenges the company faces as sales of its desktop operating systems and productivity applications have slowed.

Despite the looming end of mainstream support for Windows 2000 on June 30, large corporate customers are content to keep the operating system running on the majority of their desktops. This was the conclusion drawn by AssetMetrix, an Ottawa, Canada, software company with products that help companies track Windows and Linux licenses.

The study conducted by AssetMetrix Research Labs found that, from the fourth quarter of 2003 to the first quarter of 2005, the popularity of Windows 2000 dropped by 4 percent, from 52 percent to 48 percent, while Windows XP rose in popularity from about 7 percent to 38 percent. The study also found that implementations of Windows 95 and Windows 98 were reduced from a collective 28 percent to less than 5 percent; that Windows NT popularity dropped from about 14 percent to about 10 percent (still a considerable installed base); and that Windows XP became the most popular operating system for companies with fewer than 250 PCs. Larger companies, however, still have considerable investments in Windows 2000.

"The findings of this study suggest that Windows 2000 still plays an important part in many IT environments, with organizations often choosing Windows XP to replace Windows 98 and Windows 95," says Steve O'Halloran, managing director of AssetMetrix Research Labs. He added that companies managing their PCs without the help of sophisticated asset management tools (such as those sold by AssetMetrix) are more apt to move to Windows XP because their PC hardware has become obsolete.

The sizeable installed base of Windows 2000 is significant because next Thursday, Windows 2000 Professional and Windows 2000 Server exit the mainstream support phase of Microsoft's support lifecycle, and enter the extended support phase. This means that Microsoft will still patch security flaws (as long as they rate "important" in severity or higher), but other aspects of the operating system will not be enhanced, and customers--even those on Software Assurance--will be charged for support calls.

While Microsoft will no longer make any significant changes to Windows 2000, it is preparing one last update to the operating system. The company has an "Update Rollup" that will include a collection of security patches and other fixes issued since the last major release of Windows 2000, Service Pack 4, which shipped in June 2003. Microsoft had said to expect the Update Rollup around mid year, so we can expect to see it any week now.

What does all of this mean to Microsoft? Consider the following observations: Windows 2000 represented a breakthrough operating system for the vendor, and brought much-needed improvements in the areas of stability and security, compared to the Windows NT-Windows 98 code base. Microsoft made incremental improvements in stability with Windows XP and Windows Server 2003 (which are largely based on Windows 2000 code), and made substantial security improvements with the latest service packs to these operating systems. In terms of upgrades, customers got the biggest bang for their buck moving up from Windows NT-Windows 98 to Windows 2000, which is why that operating system is still so widely deployed, despite reaching the seasoned age of five. After another five years, all support for Windows 2000 will cease.

Microsoft's latest revenue figures reflect a reluctance on the part of some customers to upgrade to more current versions of Windows. The company's Client segment (which sells desktop operating systems) increased revenues only 2 percent from the third quarter of 2004 to the third quarter of 2005 ( which ended March 31), from $2.923 billion to $2.986 billion. The company's Information Worker segment (which sells Office productivity applications), also increased revenues a scant 2 percent (a measly $67 million), from $2.7 billion to $2.767 billion.

During that same timeframe, the company's Server & Tools segment, which sells the Windows Server System components, increased sales by 12 percent to $2.445 billion. This rate is equivalent to Microsoft's overall growth rate for 2004, when revenue increased 14 percent to $36.84 billion. At the current rates, the Server & Tools division will surpass the Client and Information Worker divisions in revenues during fiscal 2006, which starts next Friday, July 1.Fourth quarter and fiscal 2005 results are due July 21.

The IT business is volatile, and Microsoft knows it must be agile to compete. It couldn't have expected the consistent 11 to 21 percent annual increases in revenue that it had for the Client business from 1999 to 2004 to hold indefinitely. Perhaps this is one reason why Microsoft has pledged to make a big splash with Longhorn, the next version of Windows due next year. Undoubtedly, all those Windows 2000 PCs and servers are going to need something they can upgrade to at some point in time. It might as well be Longhorn.