Analysis: Small PC makers throw support behind Windows 7

They're impressed by its stability, feel it'll attract customers

Some small PC makers are paying a price for Windows 7 upgrades, but they have given a vote of confidence to the OS as it could deliver more profits by attracting buyers to purchase new systems.

Microsoft last week announced it would offer free upgrades to Windows 7 for customers who buy new PCs pre-installed with Windows Vista through qualifying partners. Most PC makers are now offering free upgrades to Windows 7 when the OS becomes generally available on Oct. 22.

But in the free upgrades for customers, some small PC makers are being saddled with upgrade costs of between $20 and $30. PC makers like CyberPower and Puget Systems are eating those charges, saying the short-term costs will bring long-term benefits that could eventually boost PC sales and reduce customer support costs.

Puget Systems is swallowing about $20 per computer per upgrade, said Jon Bach, the company's president. The company is providing free Windows 7 upgrades to those who buy Windows Vista PCs, and the cost is a small price to pay as the OS could ultimately deliver savings and build the PC maker's reputation for providing stable systems.

"That's just a strategic decision partially for marketing, partially so that we have more customers adopt it. In the long run, that's going to lower our support costs," Bach said.

Microsoft's new OS crashes less than earlier versions of Windows, and customers will be more satisfied with Puget Systems' PCs, he said. Besides being faster, the OS has shown that it could run on lower-end systems, which could help it reach out to a larger audience, Bach said.

Puget Systems was among the first PC makers to offer free upgrades from Vista to Windows 7 when it announced the program in February. Puget internally beta tested the OS for months, and Bach was so impressed with the beta's stability that he began offering customers the option to install Windows 7 Release Candidate on systems.

Another PC maker, CyberPower, is absorbing the cost because it's a good means to spur interest in the new operating system as well as PC sales. The company is absorbing about $29 to upgrade a Windows Vista PC to Windows 7.

"Windows 7 will also provide a more solid platform for gaming and entertainment over Vista," said Eddie Vong, marketing manager at CyberPower. The company has seen its PC sales spike ever since the Windows 7 upgrade program was announced.

CyberPower and Puget Systems sell high-end systems to enthusiasts like gamers, who generally spend more than $1,000 on PCs as opposed to budget buyers. For Falcon Northwest, another specialist PC maker, providing free upgrades to Windows 7 is a no-brainer because of the buzz surrounding the OS.

"That cost of [Windows 7] as a percentage of a high-end system price is a pittance to have a guaranteed upgrade. It's less than the cost of a game," said Kelt Reeves, CEO of Falcon Northwest.

The PC maker is providing the Windows 7 upgrade free, but it also plans to change its hardware pricing to partly factor in the cost of the new OS. Component prices are dropping, so prices of their PCs may actually go down even after the Windows 7 cost is factored in.

Top PC makers like Hewlett-Packard and Dell have already announced free upgrades to Windows 7 for new Vista-based PCs. Though the small PC makers consider the cost between $20 and $30 reasonable, they acknowledged that Microsoft's pricing of Windows 7 could be lower.

The cost of upgrade to Windows 7 is higher for small PC makers because top-tier PC makers may have custom deals with Microsoft to put Windows 7 on more desks, Falcon Northwest's Reeves said. For example, there could be co-marketing money involved in advertising Windows 7 and installing the OS, which could lower the Windows 7 upgrade costs for large PC makers, he said.

"I wouldn't hesitate to speculate. I'm sure they are paying an awful lot less than we are, but Microsoft doesn't give away their product for free," Reeves said. "Netscape gave away their product, and see what happened to them."

Microsoft didn't immediately respond to comment on the pricing of Windows 7 for small PC makers.

The more PC makers buy Windows 7 from Microsoft, the cheaper the OS gets, said David Daoud, research manager at IDC.

However, "You're not going to deal with Dell and HP the same way you deal with small PC makers," Daoud said.

It's not that Microsoft doesn't want to reach out to smaller vendors, Daoud said. Microsoft has different programs catering to different tiers of system builders where the OS can be bought at cheaper rates in exchange for programs like advertising and training, Daoud said.

Microsoft wants more system builders to be aboard to expand their ecosystem, but the larger PC makers will continue to get preferential treatment, Daoud said.

Copyright © 2009 IDG Communications, Inc.

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