Microsoft reported a disappointing 29 per cent slump in fourth-quarter profits after a year in which its revenues fell for the first time ever since 1986. The company's earnings sank to $3.05 billion, or 34 cents per share, from $4.3 billion, or 46 cents per share, in the same period last year. Now the company plans to go on a 'crash diet' programme where it plans to curtail all expenses to go slim.

PC World came out with its own set of reasons why Microsoft's profits are tanking. Here's a look at some of these which somewhat explain why the Redmond giant plans to go on a strict diet regime.

1. Vista

Microsoft's last operating system Vista released worldwide on January 30, 2007 proved to be a big disaster for the company. Vista aimed to improve the security of the most widely used PC operating system in the world. However, according to most software reviews, its security features weren't better than the previous versions of Windows. The fact that Vista came with its own list of hardware requirements for the users too acted as a dampener in its popularity.

Hence, Microsoft's sales decline is not just due to recession alone, but is partly due to failure of Vista to attract business interest, feel analysts. A Forrester Research shows that 86 per cent of corporate PCs continue to rely on the eight-year-old Vista predecessor Windows XP.

Many analysts claimed that Vista ran slower on PCs than even XP. Factors like these prevented Vista from taking over from its predecessors, according to the Time magazine.

Now that Microsoft Corp is preparing to release Windows 7 on October 22, it hopes the new OS will help lift PC sales out of the slump caused by the global economic downturn.

Analysts feel the release of Windows 7 could start a wave of sales for Microsoft as both consumers and businesses figure it's time to upgrade, especially after skipping Windows Vista.

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2. Xbox

Microsoft's video game console Xbox added to the company's falling profits. Xbox 360 and PC game revenue decreased $110 million, or 12 per cent, in the three months ending June 30. Gaming revenue decreased $161 million or 3 per cent over the full year. The firm’s Entertainment and Devices division as a whole made a loss of $130 million in Q4, a saving on the $171 million lost in the same quarter in the previous year.

According to experts, Xbox 360 console price-cutting in the past 12 months was blamed for the sales drop. Microsoft said 1.2 million 360 consoles were sold in the fourth quarter, compared to 1.3 million in the previous corresponding period. However, Microsoft said that 11.2 million units of 360 were sold during fiscal year 2009, compared with 8.7 million during fiscal year 2008.

Not only this, Nintendo Wii gave Microsoft Xbox tough competition. It achieved record sales and profits in the year ending March 2009. Nintendo Wii sales were strong with 57 per cent rise in America and 69 per cent in other markets to push total sales for the year to 25.95 million units. That's up 39 per cent on the same period a year earlier. For the current fiscal year, from April 2009 to March 2010, Nintendo expects Wii sales to be almost flat at 26 million.

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3. Bing campaign

Microsoft's newly launched search engine is also touted as company's riskiest play. Microsoft has not put any figure to its Bing ad campaign. However, reports peg advertising blitz to be around $100 million.

The magazine writes, "that effort will cost in the ballpark of $100 million to market, and that doesn't include development costs either. Whatever the case, Bing is one expensive gamble."

However, the search engine grabbed 12.1 per cent of US Internet searches for the week June 8-12, according to data released by industry tracker comScore. That is up from 11.3 per cent in the June 1-5 period -- the week in which Bing was launched -- and up from 9.1 per cent the week before that.

In May, Google got solid 65 per cent of US searches. As for comparison, in May, Yahoo had 20.1 per cent and Microsoft had 8 per cent share.

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4. Zune

Microsoft's media player is still to take off before it starts contributing to the company's earnings. Zune was launched in November 2006 as a rival to Apple iPod which had been in the market since 2001 and has dominated the multimedia player and music download business globally. The software giant managed to get the four largest music labels to sign licensing agreements with the company. However, it could not manage to excite customers.

According to Microsoft's quarterly statements, Zune platform revenue decreased $100 million, or 54 per cent compared to the same quarter last year, due to falling device sales. However, Apple saw a 3 per cent increase in iPod sales over the same period, while its revenue too dropped by 16 per cent.

Last November, Microsoft cut the prices on its Flash-based Zune amid both competitive and broader economic pressures. According to Bloomberg TV, between the launch date and mid-2007, only 1.2 million Zune players were sold. In May 2008, Microsoft said it had sold two million players since its launch.

According to recent reports, Microsoft plans to launch a new version of Zune later this year, incorporating high-definition video, touchscreen technology and Wi-Fi connection. However, industry experts feel Microsoft should consider exiting the Zune hardware business entirely.

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5.Netbooks

Those cheap, tiny, low-powered Netbooks that are a hit among users don't go that well with Microsoft. Though most Netbooks ship with Microsoft's most popular Windows XP, the company gets less for each copy of Windows sold on a Netbook.

Also, Windows XP Home used in these is the company's lowest-priced version. This means no big addition to the sales. What is worse that many of these Netbooks also come equipped with Linux. According to Matt Rosoff, an analyst with Directions on Microsoft, Netbooks are still cutting into the Windows PC market.

With Microsoft's latest OS Windows 7 all set to make its debut, the company wants to divert user attention from XP to its upcoming entrant and that strategy may not work so well with Netbooks.

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6. PC shipments plummet

Another sore point for Microsoft is falling PC shipments. According to IDC, PC shipments worldwide will record a drop of 8 per cent in the first half of this year.

With the global economic meltdown hitting the bottomlines across industries, large enterprises are delaying buying replacement PCs in an effort to squeeze IT spendings.

According to market research firm iSuppli, only 287.3 million PCs will be shipped in 2009, a 4 per cent decrease from the 299.2 million shipped around the world in 2008. No surprises then that this will affect Microsoft more than other software companies.