Is desktop virtualization giving Microsoft business model indigestion?

I'm still here at the Enterprise 2.0 Conference in Boston doing some interviews (we just got done taping one with SpikeSource CEO Kim Polese and it will go up soon).

I'm still here at the Enterprise 2.0 Conference in Boston doing some interviews (we just got done taping one with SpikeSource CEO Kim Polese and it will go up soon). But, in between interviews, I'm scanning my RSS feeds and noticed that both News.com and eWeek have exactly the same headline: Microsoft flip-flops on Vista virtualization (News.com version, eWeek version). Wrote News.com's Ina Fried:

Microsoft planned this week to announce that it was broadening the virtualization rights for Windows Vista, but decided at the last minute to reverse course and stick with existing limits.

The software maker had briefed reporters and analysts on plans to allow the Home versions of Vista to run in virtual machines, addressing criticisms from virtualization enthusiasts and Mac users who had chafed at having to buy one of the two priciest versions of Windows in order to run Vista in a virtual machine.

Software like Parallels Desktop for the Mac or Microsoft's own Virtual PC for Windows allow multiple operating systems to run simultaneously. When it announced licensing rules for Vista last year, Microsoft said that only Vista Business and Vista Ultimate could run as guest operating systems.....The company said in interviews this week......that it was going to make the change and leave the choice up to users....

...Microsoft provided little explanation for the about-face...."Microsoft has reassessed the Windows virtualization policy and decided that we will maintain the original policy announced last fall," the software maker said in a statement late Tuesday.

According to eWeek's Peter Galli:

Microsoft's Windows Vista team is eating crow after flip-flopping on its on-again, off-again decision to allow cheaper versions of Vista to be used in virtualized machines.

The company was all set to announce June 20 that the lower-cost Vista Home Basic ($199) and Vista Home Premium ($249) versions could be used in virtual machines, and that it had lifted its prohibition on the use of information rights management, digital rights management and its BitLocker data encryption service in a virtual machine. ....

...[The reversal in position] effectively shuts the door to Vista on an entire market of Mac users who would never normally use Windows, and it also makes it more difficult for enterprises around the globe to upgrade to Vista....

The Mac angle is particularly noteworthy now that Apple is tweaking Microsoft with its iPhone and Apple's Safari Web browser. News of both (iPhone ships on June 29, Safari will be available for both the iPhone and Windows) has many analysts and tech armchair quarterbacks saying that Mac sales could get another boost in the same way that they did on the coattails of the iPod's success. But for many Windows users with a bit of Mac envy, moving to the Mac was simply out of the question because that also means sacrificing certain mission critical apps that only work on Windows.

However, thanks to virtualization solutions like Parallels that allow Windows (XP, Vista) to run in a virtual machine on top of OS X, those users could have their cake and eat it too -- and now the barrier to switching is lower than it has ever been. This would have have been especially so if Microsoft allowed the less-expensive versions of Vista (versions that are equally capable of running those mission critical apps) to run within a virtual machine.

But now, thanks to Microsoft's reversal, for Mac users to have their cake and eat it too, the luxury of running both OS X and Vista on the same machine at the same time will at the very least cost $299 instead of $199. $299 is the cost of the high-end business version of Vista. Under these terms, Microsoft gets to extract a little more money out of hybrid users while in return, providing easily questioned business value.

In the bigger picture, making it difficult for Windows users to consider a move to the Mac is probably good for Microsoft. But could the virtualization pressure point eventually prove to be like gravity: Impossible to stop? Going back to my last piece on Google Gears and Harry McCracken's comments about the increasing irrelevance of operating systems as more apps move into the browser environment, the operating system market is getting commoditized with the browser shouldering the blame for leveling the playing field. In my own personal travels, I've seen more and more people choosing the Mac over Windows on the basis that they've grown less dependent on their Windows applications because most what they need can be had in a browser (they don't even need Mac apps). Here at CNET Networks, we have tons of Mac users that get at our Exchange Servers through Outlook Web Access (OWA). No Outlook or Windows (or even Entourage) required.

The last thing Microsoft needs is for users to be selecting systems on the basis of which one offers the best combination of style and Internet integration. It's a war that, like with Microsoft's Zude Zune vs. Apple's iPod, Microsoft has difficulty fighting. But sooner or later, the problem -- which is a business model problem as much as it is anything else -- will come home to roost in Redmond. Does that mean the end of Windows or Microsoft? Not at all. Does it mean the end of Microsoft and Windows as we know them? Quite possibly. Here in the halls of Boston's waterfront Westin at Enterprise 2.0, the inevitable transformation that awaits Microsoft is actually a topic of discussion that has surfaced multiple times.

Update: News.com's Ina Fried has a follow up story regarding Microsoft's explanation that the flip-flop was for security reasons. The story includes interviews with analysts and technologists who do a pretty good job questioning the merit of Microsoft's security-related explanation.

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