In the past, most PC makers offered free upgrades to a new operating system in the months leading up to the launch of an OS. But don't expect one for Windows XP.
Instead, owners of most recently purchased PCs will need to pay $15 to $30 for a coupon to get a copy of XP once Microsoft's operating system is released Oct. 25.
Compaq Computer was the first PC maker to break ranks and offer the OS upgrade for free. Compaq announced late Thursday that it will include a coupon with every PC it sells, allowing customers who bought a computer as of Sept. 1 to get the upgrade at no cost.
The company isn't doing it out of the goodness of its heart, analysts say.
"The reason Compaq is doing that is probably to maintain the sales momentum, clear out inventory, and to make sure there aren't any impediments in front of the cost," NPD Intelect analyst Stephen Baker said. "The reason everyone else is charging is because they think they can. They're taking the opposite tract: that the extra 20 bucks probably isn't going to change anybody's mind."
In response to Compaq, Gateway on Friday began offering its upgrade coupon for free. Until then, Gateway had been charging $15. Sources close to Gateway said the company had sold tens of thousands of the upgrade coupons up to then.
Granted, $15 to $30 for Windows XP isn't a huge hit to consumers' pocketbooks. But the fact that the upgrade isn't free reflects the current state of the market for PC makers.
"It's a significant charge and is an indicator things aren't going well. Companies aren't making money, and they're trying to protect the bottom line," ARS analyst Toni Duboise said.
At least one Windows user is especially angered, though.
"Food manufacturers and grocery stores use coupons to win consumer loyalty and reward them with savings--and they fight for consumers by making coupons convenient either through the newspaper or the Internet," said Paul Ammann, a network engineer and Windows user from New Fairfield, Conn. "Only in the computer industry could hardware and software manufacturers come up with the idea of charging consumers for coupons."
Ammann also questioned how such a move could inspire any brand loyalty. "Are companies hurting so much that (they) need to make a profit any way they can?...I'm not sure which is worse: charging for coupons or the thought that consumers would actually buy them."
The past is the past
PC makers used to offer upgrades, such as Windows 2000, for free with computers sold ahead of an operating system's release. Dell Computer, for example, included a free Windows 2000 upgrade for Windows NT desktops, notebooks and workstations for about six months before the new operating system's launch. Hewlett-Packard also offered a free upgrade program for Windows 2000.
"Microsoft and everybody is counting on Windows XP to inspire sales for fourth quarter," Duboise said. "But charging for the coupons doesn't bode well for the Windows XP marketing blitz that they're doing right now, and I think there is a little bit of a conflict there."
A Compaq representative said the company is offering the free upgrade at its own expense. Microsoft is not providing a subsidy, as it sometimes does with application software such as Office XP.
Sources at PC makers that are charging for the coupons said they, too, are paying for some of the cost of Windows XP upgrades, adding that Microsoft contributed to some software upgrade offers in the past.
Jim Cullinan, a Microsoft spokesman, said the upgrade programs are designed to allow customers who buy a PC before a new OS launches to protect their investment via an upgrade in the near future. However, he said, Microsoft does not subsidize OS upgrades.
IDC analyst Roger Kay said the coupon situation isn't surprising "because Microsoft is looking for ways to make money" on an already-saturated Windows market.
"Look at the retail price, too," Kay said of the OS, which will cost $99 to $299 on store shelves. "Not only is that higher, but you have this whole tying, bundling aspect--go to MSN, go to Passport dialog boxes--that is very aggressive. They don't say, 'Would you like to do this?' but, 'You haven't done this yet.'"
Kay said Microsoft is trying to "cajole people into signing up for these services," which also will bring in additional revenue. "All of this says Microsoft is addressing a mature market where they can't sell a lot of new operating systems, so they have to extract more money from the existing users."
A similar conundrum
Computer companies face similar challenges selling to a mature PC market during an economic downturn. According to IDC, second-quarter shipments of PCs dropped 8.5 percent from the same period last year.
But Compaq, one of the harder-hit PC companies amid the slowdown, doesn't let on that it minds footing the bill.
"We think that XP is the biggest thing happening in the industry this year...and we want to support it," said Tiffany Smith, a Compaq spokeswoman. It also helps differentiate Compaq from competitors and allows customers to buy now, instead of waiting until Sept. 24, she said.
On Sept. 24, PC makers can begin selling computers with Windows XP pre-installed. That is a month ahead of the date when boxed copies are scheduled to reach store shelves. With Windows XP systems going on sale so soon, paying for a coupon now no longer makes sense, Baker said. "But if it's going back to free, what the hell, you might as well buy now."
Dell Computer has been offering a $20 coupon that entitles its customers to an XP upgrade. Hewlett-Packard is selling it for $29.95. Both companies started offering the coupons in June.
Sony will offer customers purchasing a Vaio PC between Sept. 1 and Oct. 31 the ability to get the XP upgrade for $4.95 to cover shipping and handling.
IBM will not offer an XP upgrade, except in Japan, Australia and New Zealand, where the company continues to have strong retail sales. Customers in those countries will be able to upgrade to XP for $10 to $20, an IBM spokesman said. IBM, which no longer sells PCs at retail in the United States, said it decided not to offer a discounted upgrade for XP in North America, based on very low customer participation in previous offers.
It is possible that Compaq's announcement will cause other PC makers to follow suit. For example, a Dell representative said the company may reduce the price of its upgrade and could decide to offer a free upgrade as the operating system gets even closer to its release date. Originally, Dell's upgrade coupon cost $40.
Dell will also likely begin accepting preorders sometime this month for PCs preloaded with XP, the representative said.
Meanwhile, consumers can preorder upgrades or full versions of Windows XP at Amazon.com, Costco.com or via retailers, including CompUSA and BestBuy. By ordering early, customers can have the software delivered on or around Oct. 25.
Amazon is offering the XP Home Edition upgrade via its Web site for $99.99, with free shipping. Costco.com is selling the Home Edition upgrade for $94.99, plus $7.98 for shipping and handling. CompUSA also is offering the Home Edition upgrade for $99.99 via its Web site, but throws in a free T-shirt and a coupon for $100 off a memory upgrade.
Windows XP Home Edition will be available as an upgrade version for $99. The full version of the OS will cost $199. Windows XP Professional will cost $199 for the upgrade and $299 for the full version, according to Microsoft.