Microsoft's Vista Delay May Hurt Retailers

Microsoft Corp.'s (MSFT) decision to delay the release of its much-anticipated Vista operating system until after this year's holiday shopping season could hurt consumer electronic and office supply retailers in the fourth quarter, an analyst said Wednesday.

Microsoft, the world's largest software maker, Tuesday said it would push back the consumer version of Vista until January 2007 from a previous target of the second half of 2006 and pledged to ship the next version of the operating system to business customers in November.

Credit Suisse analyst Gary Balter said the delay is likely to hurt sales at stores such as Staples Inc. (SPLS), Office Depot Inc. and OfficeMax Inc. (OMX), but that it could more greatly impact Best Buy Co. (BBY) and Circuit City Stores Inc. (CC), as they depend more on consumer spending during the holidays.

"If Microsoft gets the product out in January, that would still be in time for the new budget spending that drives many mid-to-small businesses, the core of the office supply segment," wrote Balter in a note to clients.

"Conversely, the office supply chains need this more as a new product driver than the consumer electronics chains," he said, adding that the electronics retailers' margins could get boosted if consumers delay buying low-margin computers and opt for higher-margin consumer electronics.

"Given the plethora of new and improved products that we should see this Christmas ... if there was a year to have a delay, this is it," Balter said. He was referring to plasma, LCD and projection televisions, next-generation DVD players and more Microsoft Xbox 360 and Sony PS3 systems.

A Best Buy spokeswoman would not comment on how the delay might affect the company's sales, except to say that the home office segment, which includes computers, accessories, wireless communication devices and paper and ink for printers, made up 26 percent of total sales last December, compared to 33 percent for the third quarter.

Instead of buying a lot of computers for the holidays, people "buy a lot of MP3 players," said Best Buy's Lisa Hawks.

Shoppers are also likely to get better customer service when buying new computers in January rather than during the busy holiday shopping season.

"We want to make sure we can explain (the Vista upgrade) to the customer correctly," Hawks said. "We'll be able to do a better job in January, when our salespeople will have more time to spend with the customer and walk them through.

Circuit City spokeswoman Amanda Tate said the delay would give the company more time to train its staff and prepare its stores for the upgrade.

Vista is the first major overhaul of Windows since Microsoft rolled out Windows XP nearly five years ago.

Microsoft had originally been expected to release Windows Longhorn, now Vista, in 2005. The company scaled back its ambitions and pushed it out to 2006 before this latest delay.

Balter said the impact on retailers was not enough to change his investment opinions, but called it "a negative in the tally board of pros and cons as we begin to focus on Christmas 2006."

Officials at Office Depot, Staples and OfficeMax were not immediately available to comment.

Best Buy shares fell 44 cents to $55.06 and Circuit City shares slipped 34 cents to $24.37 on the New York Stock Exchange, while Microsoft shares were down nearly 3 percent, or 79 cents, at $26.95 on the Nasdaq in Wednesday morning trade.