Windows XP's looming retirement won't shake PC business out of sales funk

But it might help Microsoft offset Windows revenue declines as companies splurge on pricy in-place upgrades for existing hardware.

The looming retirement of Windows XP won't stem the dramatic drop in PC sales this year, but it may help bolster Microsoft's revenue, analysts said today.

Although experts expect some business laggards to buy new hardware as they try to replace the 12-year-old XP before it's retired in April 2014, the quantities won't be enough to move the PC shipment needle to the positive side of the meter.

"Replacements for Windows XP won't be enough to offset the declines on the consumer side," said David Daoud, an analyst with IDC.

Earlier this week, both IDC and rival Gartner released estimates of PC shipments for the first quarter. Both said sales had plummeted, with IDC pegging the contraction at 14%, a record in the 19 years since the firm began tracking shipments. Much of that decline was due to consumers ignoring new Windows 8 PCs, said IDC.

Microsoft has saidit will not issue security updates for Windows XP after April 8, 2014, and shows no sign of bending on the date.

"They've drawn a line in the sand," said Matthew Casey of Technology Business Research.

IDC, which has already integrated potential replacement PC sales into its forecasting model, said that the new wares will contribute to a slightly better second half of 2013, along with the usual back-to-school and holiday sales seasons.

The retirement of XP "will help the commercial PC market, but it will do zero for the consumer," said Bob O'Donnell, another IDC analyst.

But while PC makers suffer, Microsoft software will come out smelling much sweeter: It's likely to reap more revenue from the disappearance of XP than will system builders, as many corporate customers will do in-place upgrades to Windows 7 on current hardware.

In February, CFO Peter Klein said that while Microsoft was seeing a mix of in-place upgrades and hardware refreshes by companies moving off XP, to date "a lot of these upgrades [are] happening on existing hardware."

That's feasible for two reasons. First, few of the machines still running XP are as old as the operating system -- corporate refreshes have taken place since XP debuted, even if many of them were downgraded to that OS to keep corporate environments as homogeneous as possible. Second, Microsoft has reduced the hardware requirements of Windows 7 to the point where the OS can run on old-but-not-ancient PCs.

Two months ago, Klein credited Windows 7 upgrades on existing hardware for boosting volume licensing revenue. In fact, Microsoft earns considerably more from an upgrade license sold to customers than it does for a new license it sells to OEMs (original equipment manufacturers), or computer makers, for equipping new systems with an OS.

Rod Helm of Directions on Microsoft could not put a figure on the difference -- in part because what Microsoft charges OEMs for a new license is one of the Redmond, Wash. developer's most closely-guarded secrets -- but said that the System Builder version was the priciest OEM license Microsoft sells, and so a maximum for what it charges computer makers.

Microsoft will probably post Windows revenue figures during 2013 that outperform the PC business because of in-place upgrades, Helm said.

In a purchase of 1,000 upgrade licenses for Windows 8 Pro -- which include downgrade rights to Windows 7 Professional -- each license costs $184 under Microsoft's Open Licensing program, one of its most expensive. Meanwhile, a copy of Windows 8 Pro System Builder costs $96 on Amazon.com.

In other words, Microsoft makes about twice as much from a corporate in-place upgrade than it does from a sale to an OEM. No wonder the company's happy to see businesses move off XP by upgrading existing hardware.

But not all XP users will bother to upgrade. IDC's Daoud said that many businesses have downsized to the point where they have a surplus of PCs, and will simply set aside older systems running XP. Consumers, on the other hand, are even less likely to buy a new PC to replace their aging XP machines, instead steering toward smartphones and tablets as substitutes.

Microsoft will hold its quarterly earnings call with Wall Street analysts next week, on April 18, starting at 2:30 p.m. PT, when it will reveal revenue figures, signaling whether in-place upgrades helped offset the drop in income from OEM licensing.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is gkeizer@computerworld.com.

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