Following the loss by the second-ranked Swiss, Rafael Nadal is now the clear favorite for the title -- or the next big name who should be wary of an upset.
Nadal didn't let his sore knee get in the way in a 6-2, 6-3 win over Mikhail Youzhny that put him in the quarterfinal, and third-seeded Andy Murray had to come from behind to edge past Giles Simon 2-6, 6-4, 7-6 (6).
"Clearly the favorite for this tournament is Nadal," Federer said.
Last year, Federer didn't let the slick "Smurf-colored" clay stop him from winning his third title in Madrid. But now with the old-fashioned red clay back at the Caja Magica, Federer only managed to look like the star he is for a spell.
After recovering from Nishikori's strong start, Federer looked as though he'd found his stride as he roared back in the second set, but Nishikori reasserted his ground game in the decider, breaking Federer for a 3-1 advantage before holding on for the surprising win.
Nishikori said beating Federer after losing their only previous meeting was one of the high points of his still burgeoning career.
"He was my idol and to beat him was one of the goals for my tennis career," the 16th-ranked Nishikori said. "Beating Roger is, yeah ... I need a couple of days to celebrate."
Federer came to Madrid after a seven-week layoff. He said the gusting winds hurt his game, but he gave all credit to Nishikori.
"He was the better player today for sure," Federer said. "I was lacking control from the baseline and that carried through from start to finish. Overall I'm disappointed with my play."
Federer said he will not change his plans and will now train for Rome and then the French Open.
Nadal's commanding win over Youzhny featured an array of winning shots.
Having already established control by stealing Youzhny's second service game, Nadal kept a point alive with a deft no-look backhand flick before nailing a winner down the line to hold his serve and delight his fans.
The fifth-ranked Spaniard then broke Youzhny again by dinking the ball over the net while on the run, giving it so much backspin it twisted away from the Russian.
Nadal, who is searching for his seventh straight final since returning from injury, improved to 28-2 this year.
Nadal said he was still bothered by his left knee, which has sidelined him this year with a nagging case of tendinitis.
"Sometimes I have pain," he said. "I try to avoid talking about it as much as possible. With respect to my rivals it's not the moment to analyze how I am."
Murray looked stiff as he conceded the first set to Simon but the Scot improved from there, and after winning a long game to break back early in the second, slowly imposed his will. He did squander five match points before Simon netted his final approach shot in the tiebreaker to end it in just under three hours.
Williams' dominant performance made Kirilenko wither after she dropped the first set with one of several unforced errors.
"I just felt really relaxed, like I was taking my time," said Williams, adding that she strived for precision over speed on serve.