Microsoft Vista delay seen hurting PC firms

By Philipp Gollner and Kiyoshi Takenaka

SAN FRANCISCO/TOKYO- Microsoft Corp.'s decision to delay the release of its Vista operating system is expected to hurt makers of memory chips and computers, including Dell, which had hoped Vista would boost sales late this year.

Microsoft of Redmond, Washington, the world's biggest software maker, said it planned to delay the consumer launch of its much-anticipated Vista operating system to January 2007 from its earlier target of the second half of 2006. Microsoft plans to launch a corporate version in November.

The largest PC makers saw their shares slide between 1 percent and 2 percent, while some chipmakers fell as much as 3 percent.

"The disappearance of Vista from the holiday 2006 selling season is likely to have a bigger impact on semiconductor companies than a simple few-week delay might imply," wrote Merrill Lynch & Co. analyst Joe Osha in an investor note.

"We expect some intermediate-term weakness in DRAM pricing, with a resulting knock-on effect for stock prices of DRAM makers including Micron," he added, referring to dynamic random access memory (DRAM) chips used mostly in PCs.

The delay also could also hurt consumer electronics and office supply retailers including Staples Inc., Office Depot Inc. and Circuit City Stores Inc. in the fourth quarter, Credit Suisse analyst Gary Balter said in a note to clients.

Consumers are likely to wait until the new operating system is available before buying new computers, said Shaw Wu, an analyst at American Technology Research Inc. in San Francisco, who has a "buy" rating on Dell stock and a "hold" on HP.

"It makes the second half more difficult now" for PC makers, Wu said. "There's less of a driver for sales."

TWICE THE MEMORY

Dell, based in Round Rock, Texas, disappointed investors last year with slower-than-forecast growth, and had been hoping Vista would give it a boost.

Consumer PCs make up about 15 percent of Dell's sales. The bulk of its revenue comes from corporate sales, which will not be affected by the delay in launching the Vista consumer system.

Microsoft said it delayed the consumer version to improve quality, especially security. It also said PC makers didn't want the operating system introduced in the middle of holiday sales as a new version would create instability in the market.

Microsoft, which has not overhauled the consumer version of Windows in over four years, had originally been expected to release Windows Longhorn, now Vista, in 2005. The company scaled back its ambitions and pushed the launch out to 2006.

The delay weighed on shares of Asian DRAM makers, which are counting on the new operating system to spur demand for standard memory chips used in PCs.

"Newer operating systems tend to be more complex than old ones, and that means it requires more DRAM and more memory, so that benefits chip makers," said Kim Hyun-tae, a fund manager at Landmark Investment Management.

Analysts in Asia said the fall in shares of DRAM makers was largely due to the psychological impact of the delay in the high-profile launch, although the actual effect on their earnings should be limited.

"Vista has been seen as next year's earnings driver in the first place, so I don't see that much of an impact," J.P.Morgan Securities analyst Yoshiharu Izumi said.

Elpida Memory Inc., which focuses on DRAMs for use in mobile phones and digital electronics, fell 3 percent.

(Additional reporting by Eric Auchard and Duncan Martell in San Francisco, Daisuke Wakabayashi in Seattle)