Countdown Begins on Microsoft Pulling Plug on Windows XP

The clock is ticking on Microsoft Corp.’s (MSFT) Windows XP.

A year from today, Microsoft will end support for XP, meaning millions of PCs that still rely on the operating system will no longer receive monthly security patches and system updates–a critical juncture for owners of the 39% of PCs worldwide still relying on XP.

Windows 7 was designed to eclipse XP, but since its introduction nearly four years ago, it has been installed on only 45% of PCs, according to data tracker netapplications.com. Microsoft’s newest touch-friendly Windows 8 operating system introduced last year is running on 3.2% of PCs.

The challenge for Microsoft is to retain its dominance in PC operating systems as it struggles to push a huge installed based toward change. Consumer preference for smartphones and tablets and away from PCs is complicating the shift, and data show Windows 7 adoption has leveled off over the past four months, which has depressed Microsoft’s stock.

“The issue with Microsoft’s stagnating share price is the uncertain outlook for Windows,” said analyst Raimo Lenschow of Barclays.

Microsoft’s Windows unit generated $18.8 billion in revenue in fiscal 2012, little changed since 2010. It’s slipping behind the company’s Office and Server & Tools units as the main growth engines, Mr. Lenschow said. Breaking down the businesses into their individual growth and profit rates, he estimates Windows makes up only about $2 of Microsoft’s current share price of $28.59.

Ending support for Windows XP “is only going to be a small driver” of further Windows adoption, he said. Most businesses already have begun the transition, and consumers won’t dump XP and embrace Windows 8 until there is a larger variety of devices with longer battery life.

For its part, Microsoft said in a written statement that “a vast majority” of XP users are migrating to modern versions of Windows, or already have done so. The company will offer custom support agreements for XP to users that can’t make the transition by April 2014. It’s also offering small and medium-size businesses a 15% discount through June to upgrade XP machines to Windows 8 Pro and Office 2013.

Nonetheless, shifting consumer tastes are complicating Microsoft’s effort to move users to Windows 7 and 8. Sales of Windows PCs fell 11% over the holiday period compared with a year ago, according to retail analyst NPD Group. Even corporate customers–a cornerstone of Microsoft’s business–are projected to slow PC buying as mobile workers shift to tablets.

Businesses large and small adopted XP a decade ago and used it to write custom applications to run their businesses. Few embraced Windows Vista when it appeared in 2006 and Windows 7 appeared in the middle of a recession, when many companies decided to make do with XP a little longer.

“The bad experience we had with upgrading to Vista is one reason to hesitate when [Windows] 7 came,” said Martin Siltanen, head of IT for Midroc Europe, a Swedish contracting and property investment firm with operations throughout Europe.

With few exceptions, Midroc has rewritten applications for Windows 7 and the upgrade from XP is now nearly complete. Windows 8 and integration of PC, tablets and smartphones are appealing, but he hasn’t begun planning that transition yet.

Many enterprises that are buying new hardware are slow to upgrade because they have many applications written for XP that are costly and time-consuming to rewrite, said Gary Schare, president of Browsium Inc., which helps customers transition old applications to new operating systems.

“We find a lot of modern hardware running older XP software,” he said. “Now those companies face either a rapid upgrade or paying high-priced custom support agreements with Microsoft,” Mr. Schare said.

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