Microsoft’s $8.5 billion problem

I don’t know about you, but I wouldn’t want to be anywhere near Redmond this week, and certainly not within furniture-heaving distance of Steve Ballmer’s office. It’s been a bad bad week for Microsoft Mavens.

First, the financials. While Microsoft still generates buckets of greenbacks — $16.6 billion in revenue last quarter– profits are down by $600 million and the company failed to meet its estimates. So, naturally, it got spanked by Wall Street. Microsoft shares are trading at around $17.50, their lowest level since 1998. (Hey, maybe Yahoo can afford to buy them now.)

Worse: This week the company announced the first major layoffs in its history. Some 5,000 heads will be lopped off over the next 18 months, and if the rumors are to be believed, many of them will be coming from the Entertainment and Devices unit. If you own a Zune, better hang on to it — as a collector’s item it might fetch a nice price on eBay in 20 years.

Today Microsoft got more bad news. As Computerworld’s Gregg Keizer reports, a settlement in the Vista Capable law suit could cost the company as much as $8.5 billion dollars. Why so much? Because that’s what University of Washington economics professor Keith Leffler estimates if would cost to upgrade every computer sold under the "Vista Capable" label to actually be Vista Capable. To wit:

Leffler arrived at his minimum and maximum upgrade costs by estimating how much it would cost to upgrade each Vista Capable machine to 1GB of memory and a graphic card capable of running Aero. It would cost a maximum of $155 to upgrade each desktop, and between $245 and $590 to upgrade each notebook….All told, it would run Microsoft $832.7 million to upgrade the Vista Capable desktop PCs, and between $3.08 billion and $7.69 billion to fix the affected notebooks.

It’s an absurd figure in many ways. For one thing, Leffler is an expert witness for the plaintiffs in the class action, who stand to benefit greatly from that kind of payout. For another, the notion that you’d actually upgrade these computers to run the Vista OS is lunacy. By the time this suit winds its way through the courts, appeals, and settlement process, those computers are going to be landfill. Given how good Microsoft is at endlessly drawing out the legal process, the computers that replace those machines may also be landfill.

But this is the US court system we’re talking about. When it comes to technology suits, absurdity is standard operating procedure. So don’t totally discount it.

Here’s my bet. The case is set to go to trial in April. Rather than risk even more embarrassing disclosures about just how much it knew about Vista’s overall suckiness and its backroom deals with Intel, Microsoft will offer to settle. The terms will be something along the lines of a coupon for a free upgrade to Windows 7 for any system regardless of purchase date, attorneys’ fees for the plaintiffs, and a promise to be a more honest, upstanding labeler of its products (without admitting any wrong doing, of course).

Remember: You read it here first. Unless of course this doesn’t happen, in which case feel free to forget where you read it.

Is Microsoft headed for a fall? Post your thoughts below or email me: dan (at) dantynan (dot) com.

This post originally appeared on Infoworld’s Notes From the Field blog.

Image of Steve Ballmer courtesy of the Epicycle blog.

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