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2005: The Longhorn Reset
Microsoft had big plans for the successor to Windows XP. It was code-named "Longhorn," and it was filled with "gee golly whiz" features that were going to take the world of personal computing by storm. Longhorn made a big splash at the 2003 Professional Developers Conference (PDC) and a beta shipped in 2004. Unfortunately, most of what was in Longhorn didn’t work particularly well. As the calendar rolled over into 2005, the Windows team reviewed their grandiose plans for Longhorn and scaled it back, throwing away much of the development effort and essentially restarting from scratch.
That decision, which became known as the “Longhorn reset,” was publicly revealed in an embarrassing Wall Street Journal article in 2005. "Longhorn was irredeemable ... Microsoft needed to start over."
(You can see what Longhorn was supposed to be in this gallery from Stephen Chapman.)
2006: Windows Vista stumbles out of the gate
After the Longhorn debacle, it was almost inevitable that the next release of Windows would be a more modest affair. No one expected it to be such a horrible mess.
Delay after delay had conditioned Microsoft's PC-building partners to ignore deadlines. As a result, they were unprepared for the major changes in the Windows driver model that were at the core of Windows Vista. On top of that, Microsoft had deliberately allowed some OEMs to ship with video hardware that didn't support Vista's signature Aero feature.
It was a collective failure. Microsoft delivered a messy glop of code that didn't work well until Service Pack 1, and the OEMs made the experience much worse by packing their products with performance-sapping crapware. The Vista tagline, "The Wow Starts Now," is still one of the most cringe-worthy ever.
2007: Vista's woes continue with WGA problems
Besides widespread security problems, Windows XP had been burned badly by piracy. One of the most important additions in Windows Vista was a new anti-piracy infrastructure that mixed product activation and ongoing validation to verify that an installation was valid ("Genuine," in Microsoft's curious marketing-speak).
The Windows Genuine Advantage program was an absolute mess in 2007, with many innocent customers finding themselves accused of piracy when they installed a new program or changed a hardware device. A Microsoft Knowledge Base article early in 2007 admitted: "This problem does not occur because of an issue in the installed program or device driver. This problem is caused by a system problem in Windows Vista."
By 2008, most of the user-hostile problems in WGA had been resolved and the system worked as intended. But the damage was done.
(For a depressing history of Vista's anti-piracy initiatives, see "Microsoft finally earns a passing grade (barely) for WGA.")