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OCTOBER 25, 2001 SPECIAL REPORT: WINDOWS XP Not-So-Great XPectations Despite Microsoft's all-out hype, XP's prospects are dimmed by a bad economy, global tensions, and complicated licensing policies
That's just the start of the $500 million marketing campaign the software king is rolling out to try to persuade businesses and consumers that they must have the latest Windows operating system (OS). The company's goal is to recreate the rousing response that Windows 95 received -- perhaps the only time in recent memory when people lined up around the block to buy a mere piece of software. PARACHUTE? Too bad Microsoft's timing is so awful. As the world economy heads south, the company will be lucky if XP matches the modest initial success of Windows 98. Consumers, still shell-shocked from the September 11 terrorist attacks, are clutching their wallets. Companies with frozen information-technology budgets have a wait-and-see attitude. Gone are the expectations that XP will cause an instant rebound in the moribund personal-computer industry, let alone for the tech sector as a whole. In fact, XP might act more as a parachute than a buoy. According to tech consultancy Gartner Dataquest, worldwide PC shipments dropped 11.6% during the third quarter of 2001 vs. the same period a year ago. That decline, from 34.6 million units to 30.6 million, represented the third consecutive quarterly drop in PC sales. In the U.S. alone, shipments slid 18% for the quarter. Many of those disappointments were building before September 11, thanks in large part to shrinking corporate tech budgets. But the attacks clearly exacerbated the tech implosion. For many consumers, a new PC has become a discretionary purchase. For businesses preoccupied with shoring up security amid general belt-tightening, the prospect of migrating to XP has all the earmarks of just another headache -- particularly if they switched to Windows 2000 just 12 months ago. "DEFINITELY CONCERNED." "We have seen some replacement of PC software deferred due to economic conditions. And for a business that's on Win2000, there is little reason to move to XP," says Michael Silver, research director at Gartner. Factor in the bombing in Afghanistan plus bioterror threats in the U.S., and PC makers worry that consumers and businesses won't feel the need for XP until next year or even 2003. "We are definitely concerned about the world situation and what it means for us," says a senior executive at one of the top five PC makers.
For starters, XP comes hard on the heels of Win2000, which was released to business and professional users just a year or so ago. Initially, Microsoft hoped to force all corporate customers to switch to WinXP by exacting a significant price increase on XP installations ordered after Oct. 1, 2001. A backlash forced it to retreat from that policy (see "These Licenses May Be a Colossal Blunder"). UPGRADE VIA SUBSCRIPTION. And that's only one of the many disputes still brewing over Microsoft's new licensing policies. The key complaint: Redmond now requires customers to pay an annual fee after their initial license purchase in exchange for "free" upgrades during the term of the contract, which would be for several years. Companies that choose not to buy the subscription service, dubbed Software Assurance, will have to repurchase licenses whenever they want to upgrade. Gartner claims that the switch will bump up the cost of running Windows by at least 33% for most customers. Microsoft counters that the new policy will save money for the top 30% of its customers, who constantly upgrade and won't produce any extra drag on the 50% of its customers who upgrade fairly regularly. Further, the new pricing scheme means there are now only three different plans under which customers can license Microsoft products, which the company claims will save customers time and hassle. It also says IT managers will be able to plan software upgrades without having to worry about incurring huge extra costs for big installations, since XP will be sold on a subscription basis for those who chose Software Assurance. Rebecca LaBrunerie, the worldwide licensing and pricing-program manager for Microsoft, says this is useful because now "a lot of corporations often don't know what they're spending from year to year" on technology. NOT ONE FOR ALL. Microsoft will also test its controversial licensing changes on the consumer side, where XP could have an even bigger impact since it represents a major leap forward from Windows ME, which was released to consumers last year. Gone are the days when a household could buy one copy of Windows and install it on all of its machines. Windows XP will curtail that with a new verification process that will shut down unauthorized copies after 50 uses or prompt a user to pay for a second copy. Microsoft has offered partial discounts to households or families purchasing multiple copies, but whether that appeases users remains an open question. Costs could range well into the hundreds of dollars when both XP and Office XP and multiple machines are involved.
Microsoft remains confident that XP will win over consumers and businesses with upgraded features, such as better digital photography software, easy-to-set-up video conferencing, and enhanced networking capabilities. Add all that to XP's improved stability, and Microsoft thinks it can overcome the current economic climate and register solid sales for the holiday shopping season. "The early indications are very, very good," says Greg Sullivan, a lead product manager for XP. "I think we're seeing that reflected in some of the early results and some of the feedback we're getting." HOPE FROM HOMEBODIES. One thing that could help make those predictions come true is an unprecedented marketing campaign, which will include TV spots featuring pop star Madonna. Some retailers also think that PCs and ultimately XP will benefit from skittish Americans venturing out less and spending more on home entertainment. "We may not see it immediately, but we think PCs will be one discretionary purchase that may enjoy a positive impact due to the fact that people are going to spend time in their houses," says Dan Bode, a divisional merchandise manager for home-office products for electronics-retailing chain The Wiz. Bode -- and Microsoft -- hope that XP will deliver a merry Christmas. But it might take more lift than Santa and the reindeer can muster to get this software onto the hard drives of strapped companies and wary consumers. With all revenue bets off for XP, it might be a case of holiday dreams deferred for Gates & Co.  By Alex Salkever in New York City Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | OCTOBER |
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