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As Microsoft heads into 2007, the company faces a number of ongoing threats and challenges, most notably getting its large installed base to upgrade to the latest wave of products.

“The larger the installed base gets, the harder it is to move, and the longer it takes to transition,” Al Gillen, vice president of research at IDC, told eWEEK.

Microsoft also needs to remain competitive against the open-source Linux operating system, on both the client and server side, as well as get its virtualization house in order so as to compete aggressively against established players like VMware.

While the software company will make Windows Vista, Office 2007 and Exchange server widely available at the end of January 2007—with Windows Server “Longhorn” expected to ship in the second half of the year—analysts are not expecting enterprise uptake of these products to be significant in 2007.

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“In general, Microsoft’s best year usually comes the year after the release of new technology, not the year of the new product release,” Gillen said.

But 2007 is not expected to be just about pushing sales and upgrades of the latest wave of products for Microsoft, but also a year in which the company continues to talk about its product strategy going forward and where it announces new product categories that will target consumers and small businesses, Rob Enderle, principal analyst at The Enderle Group, told eWEEK.

“The synergy between groups should also become more evident in offerings that can move between platforms and groups as a result of the company’s reorganization and the work being spearheaded by Chief Software Architect Ray Ozzie,” he said.

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The broad availability of Vista, Office 2007 and Exchange 2007 is expected to snag most of the attention early in the year, particularly as consumer sales and shipments are expected to shift to Vista immediately, IDC’s Gillen said.

“But, in the case of enterprise customers, we expected across-the-board downgrading to Windows XP through at least the first six to eight months of 2007 because companies typically move into new products carefully and deliberately,” he said.

Also, while customers will evaluate Office 2007 independently of Windows Vista, any broad movement to Office 2007 is likely to be dampened by the slow adoption of Vista, as many customers will want to deploy the two technologies together, he said.

However, Michael Cherry, the lead Windows analyst at Directions on Microsoft, said he expects 2007 to be a good year for Microsoft with regard to Vista.

“I think there are features that business should be interested in, such as User Account Control and BitLocker Drive Encryption, and there could be pent-up demand,” Cherry said.

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Some businesses chose to skip Windows XP and Windows XP SP2, and now need to consider Vista. “They are also likely to need new hardware, so the hardware requirements are not likely a barrier in these cases. There are some who will want to deploy Vista and Office together, if it can be shown it minimizes deployment costs,” he said.

But analyst Enderle said he is not seeing much demand for Vista or Office 2007, which “are also being launched during the slowest time of the year for sales.”

While Enderle said he expects 2007 to be a good year for Microsoft on balance, he added, “timing is clearly going to be a problem. In addition, Apple, which is at its strongest, is going to move aggressively against Microsoft, who is in anything but peak shape. That will add extra drama to the entire year.”

IDC’s Gillen said the fact that Microsoft has become a complex company with a lot of products in its portfolio will likely mean that 2007 is not just a year of purely selling new products. Windows Longhorn Server still has to launch over the year, he said, and there is a “tremendous focus within Microsoft” on getting caught up on the virtualization front, a critical area for the company.

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“I would expect that we will continue to hear about product strategy as well as product sales. That said, with Vista launched, it is likely that the company will step back and objectively consider how it will organize itself for the next round of product development,” Gillen said.

From a competitive standpoint, Gillen said the biggest threats facing Microsoft as it goes into the new year include that from its own installed base.

Gillen said while Linux was already a threat on the server side, Microsoft’s current emphasis on reducing piracy on the client side, “may accidentally accelerate the option of Linux as a client operating system. Microsoft’s client operating system anti-piracy efforts may well backfire and that very anti-piracy campaign could drive customers toward Linux.”

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Also, on the virtualization front, Microsoft had been unable to stall the market while it got its products into play, so the company now finds itself in the unusual position of having to battle its way back to a competitive position in the market against established competitors such as VMware, Gillen said.

For Cherry, the greatest challenge is Microsoft’s performance. “It has to get better at describing in meaningful and measurable terms its message around Windows and Office Live. It has to make it easier for customers to legally use its products,” he said.

Customers have to be able to understand how to best license only the amount of software they really need to be productive, and no more, he said.

As the licensing programs were extremely hard to understand, Microsoft has to do a far better job of communicating when products will be delivered, and what features they will include, Cherry said.

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For his part, Enderle said the biggest threat Microsoft faces is from itself. It has unintentionally been the engine underneath Linux and has not completely fixed that.

Microsoft will also continue to adjust its competitive stance against open-source software as the Linux executives it has hired gain power and increase their influence, he said.

“We will also see Microsoft start talking about the revolutionary changes that will happen post-Vista and those offerings for Vista that have, as yet, not been announced,” he said.

But the company continues to struggle to find its center, Enderle said, noting that Microsoft’s biggest problem is not open-source software or Apple, but rather “to return to vitality so it can compete as it once did, and enjoy the financial benefits of a robust equity market surrounding its stock.

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“Microsoft desperately needs to identify the customer they must serve for each product/solution and place everyone else in subordinate positions. They have the biggest engine and fastest car in the race, they need to focus first on pointing it in the right direction, and then on hitting the gas, not the other way around,” Enderle said.

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