A change of Vista
I've got as much reason to hate Microsoft (NASDAQ:MSFT) as anyone else does -- after all, I use a computer. I need to kill Internet Explorer about 10 times a day because someone at Mr. Softy HQ can't get things right. My beloved, 10-year-old SCSI devices no longer work the same as they used to because Redmond decided, with Windows XP, to drop a few things into the roadside ditch along the Information Superhighway. That morbid bit in the SouthPark movie where the general shoots Bill Gates? I think we can all relate.

But as annoying as Microsoft's OS can be, the company has, at various times over the past year or so, seemed like a pretty good investment idea. I even advocated it in last year's Motley Fool Blue Chip Report. Back then, a lot (though not all) of Wall Street experts wouldn't have touched Microsoft with a 10-foot joystick. Over the past few months, however, as the Xbox appeared to get some traction, more and more of the Street seems to be back in the Microsoft camp.

I'm never comfortable when too many people agree with me, so I think I'm going to switch sides. And I think I've got some decent reasons. After this week's announcement of yet another delay in the next-generation operating system, Vista, I am starting to wonder whether Microsoft isn't set to disappoint us for a lot longer than I expected.

Big dumb cow
Let's review the Vista timeline, shall we? Beginning with the folksy-sounding code name "Longhorn," Vista first surfaced shortly after dinosaurs sprouted wings, roughly 36 Macintosh operating systems ago, or, in the common tongue, some time back in 2001. After years of preliminary work, it was ditched and reworked, and then we were told to look for it in 2006. Then we were told not really to look for the whole thing in 2006, but some of it, though minus the fancy new file system, which we'd see in 2007. Now we're told that the business version (minus the fancy file system that businesses might like, I think) will make it out in 2006 but the consumer versions are on for January, which pushes it to 2007. Anyone else dizzy?

Behind the times
Unfortunately, Vista isn't the only important Microsoft product to suffer major delays. Last week, I nearly penned a commentary to be titled "Dude, Where's My Xbox?" or "Why Ballmer Needs to Lay Off the Monkey-Boy Dance and Hire Some Xbox Makers." Frankly, I've been pretty annoyed with the thin availability of the Xbox 360 over the past three to four months. Having too few boxes ready for the holiday season may have been a nice way to generate buzz, but the continued lack of the higher-end system has been far less impressive. I've been in the market for two Xboxes for months, and I've been unable to find them except in a "gouger's special" -- that is, bundled into an $700-to-$1,200 package by retailers like GameStop (NYSE:GME) who want -- understandably -- to sell me a pile of add-ons and games I may or may not actually want.

This is more than just a personal rant. It's a reflection on a real business risk. Now that I know Sony's (NYSE:SNE) next PlayStation is coming in November, I'm more inclined to turn my back on Microsoft and simply wait for the game box that will come with a Blu-Ray drive -- that way, I can play high-def movies on my high-def TV. I can't be the only one thinking those thoughts, and that's bad, because the Xbox business model depends not on profiting from Xboxes themselves, but in building a large consumer base on which to sell ancillary content. That's in danger because Microsoft flubbed its lead.

While we're still close to Sony, let me get to problem two. Two of the segments with the biggest growth potential at Microsoft are (not surprisingly) unprofitable -- Windows Mobile and Home Entertainment. That's not necessarily bad. In fact, as I've pointed out elsewhere, it's part of the plan.

But continued, missed deadlines make me wonder whether the plans will ever work out. It's tough to move from losses into gorilla-game profits on mobile, operating systems or the living-room computer of tomorrow, unless you actually become the gorilla. Setbacks here allow competitors to get ahead. Why isn't Microsoft enjoying the fruits of Research In Motion's (NASDAQ:RIMM) success with handheld email? Because it didn't get ahead of the curve, and there are some who doubt that it can recover in this space, despite long-overdue OS relationships with feature-rich phone makers like Palm (NASDAQ:PALM).

Microsoft cannot afford to lose a similar battle in the living room to the likes of Apple (NASDAQ:AAPL), long rumored to be working on a media "convergence" device. And the delay in Vista, once again, leaves the door open longer than it needs to. Remember, part of Vista's selling point is that it will feature better entertainment capabilities allowing users to record and serve all types of media out to the living room -- preferably through the Xbox. (Currently, Windows XP users can't stream video to the Xbox.) So the setback in Vista doesn't just dent the holiday prospects for outsiders; it nicks Microsoft twice.

Back to the big window
Listen, I know Microsoft's got real challenges that none of its competitors face, such as incredible government scrutiny, a giant installed base, and the inability to do anything right, at least as far as the headline writers of the world are concerned. Unlike, say, Apple, which can just go ahead and break old applications every few years and still hear applause from the zealots. ("Thank you, Jobs! May I please have another?") Microsoft has to answer to everyone.

That's a tough job, and it takes time. How much time is a debate better left to the code geeks out there. But as investors, we get the luxury of wallowing in abject, pecuniary skepticism. We get to judge our companies by what they're doing for us, not what they mean to do. Mr. Softy's still trading at a discount to the $34 a share I think it's worth. But that intrinsic value estimate is based on predictions for the future, and that prediction may need to change. We're watching you, Mr. Softy. Try and get 'er done. On time. For once.

Microsoft is a recommendation of Motley Fool Inside Value . For a look at why, as well as a peek at a few other undervalued techs, a free trial is available. Palm and GameStop are Motley Fool Stock Advisor recommendations.

Seth Jayson is looking forward to that Xbox. Unless he's looking forward to the PlayStation. At the time of publication, he had shares of Microsoft but no positions in any other company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.