Windows XP sales lag

Retailers sold 250,000 copies of Microsoft's new OS in November, down from 400,000 in October. But analysts say retail sales don't tell the whole story.

4 min read
November retail sales of Windows XP weren't so hot. But is the operating system a flop? Maybe not, analysts say.

Microsoft's biggest operating system launch ever has failed to generate enough retail sales to push past its predecessor, Windows 98, according to market researcher NPD Intelect.

The Gatekeeper: Windows XP Retailers sold 250,000 copies of Windows XP in November, its first full month of availability, down from 400,000 in October. The October sales account for six days on store shelves plus preorders. By contrast, consumers snapped up 580,000 copies of Windows 98 during its first month on store shelves and 350,000 during the following 30 days.

But retail sales are not the key measure of an operating system's success, analysts say. Copies sold at retail are "boxed" upgrades or full versions for consumers looking to move to the newest version of Windows. The more accurate measure is client licenses sold to PC makers or businesses. By that accounting, analysts say, Windows XP already is primed to have the most successful first year on the market of any Microsoft operating system.

"Retail sales are like gravy for Microsoft," said Howard Dyckovsky, an NPD Intelect analyst. "It helps them get their name out there and keeps them in front of the consumers. But the overwhelming majority is going to be on new computers or client licenses."

Dyckovsky attributed XP's slow retail start to a number of factors including the weak economy, the saturated PC market, and presales of Windows XP PCs. While consumers had to wait until Oct. 25 to get a boxed copy of Windows XP, PC makers shipped the operating system on new computers a full month earlier. Additionally, more consumers upgrade their operating systems by buying entirely new computers, rather than buying new versions of Windows to put on older PCs, according to Dyckovsky and several others.

Sales were "probably not what Microsoft expected last spring," Dyckovsky said. "But it's probably very close to what they expected after Sept. 11."

Retailers responded to the weak economy by stuffing XP holiday stockings with freebies such as RAM and Palm handhelds--often worth more than the cost of the operating system--to encourage sales.

IDC analyst Al Gillen said comparisons to Windows 95 and 98 can be deceptive.

"Microsoft has a client shipment base of close to 100 million licenses a year," he said. "If you go back to Windows 95, they had a shipment base of about 20 million, and if you added Windows 3.1/DOS, about 50 million. Windows 98 was 73 or 74 million. So you're talking about a very different comparison."

In 1996, Windows 95's first full year of availability, Microsoft shipped 19 million licenses, according to IDC.

"They've already done 10 million licenses, so they're well on their way to beating the first-year totals for 95," Gillen said.

Microsoft sold 12 million to 13 million Windows 98 licenses during 1998, which was a partial year of availability, according to IDC.

"If there is a comparison to be made here, and it's for the retail market, from a retail perspective things might not have been as good as they were in the past," Gillen said. "But I still have the expectation that XP in its first full year of availability will surpass anything else that Microsoft has ever launched."

Jim Cullinan, Microsoft's Windows XP lead product manager, agreed with Gillen.

"Windows XP is the best selling operating system ever in the first two months of availability, and it has exceeded all expectations," he said. "While there is a small percentage of Windows users that are able to upgrade to Windows XP, retailers have reported better than expected sales since launch in October."

"Sales of Windows XP have surpassed expectations, even with the very difficult economic climate, because of the compelling experiences it brings to consumers," Cullinan said.

Sign of the times
Dyckovsky, in fact, concluded that the heyday of big Windows retail sales are over.

"It's a sign of the change in the market that operating systems relatively aren't as important in the retail market," he said. "As they require more hardware upgrades, and computers get more powerful and cheaper, the question is: Do I upgrade to a new operating system or do I get a new computer?"

Certainly bargain hunters are finding good deals in new XP computers, with fairly beefy configurations starting as low as $599, making the choice of a whole new PC vs. a Windows upgrade very enticing.

Still, PC sales during the all-important Thanksgiving week, which retailers use as a barometer to forecast holiday sales, dropped 10 percent from a year earlier, according to NPD Intelect. On the other hand, that was up from steep 20 percent and 30 percent declines in the preceding months.

Ultimately, gauging Windows XP's success may depend on the nature of the comparison.

Gartner Dataquest estimates 10 percent of PCs sold this year will pack Windows XP compared with 11 percent for Microsoft's earlier Windows Me. Both operating systems sold on new PCs for about the same amount of time, but Microsoft released Me during a stronger sales cycle for new computers.

But XP adoption may be the stickler for Microsoft, which again may be affected by the economy and by changes to how often consumers and businesses buy new PCs.

Gartner predicted only 26 percent of consumers would be running Windows XP next year, with that figure not topping 50 percent before 2004.

"If XP can't do better than those other two products (Windows 95 and 98), there is something wrong," IDC's Gillen said. "But I expect that it will exceed them."