System builders eXPerience gain, as large vendors feel Vista pain

An opening for the 'white box' guys as OS dismay continues

While the evidence is mixed as to whether or not Windows Vista is driving sales for large PC vendors, it may be jump-starting profits for their small U.S. counterparts.

Some system builders say their sales are up this year, as consumers and small-to-medium-sized businesses (SMBs) come to them for "white box" PCs installed with XP and eschew brand-name PCs preloaded with Vista.

"My business has actually gone up since Vista's launch," said Paul Ghysels, owner of the Neighborhood Computer Store in Moraga, Calif. Ghysels estimates that only two out of the almost 400 PCs he's sold so far this year had Vista on them.

Small assemblers say that demand for XP has risen steadily this year, as the initial excitement around Vista's January launch wore off and complaints about Vista's hefty system requirements, unsupported devices and software, and bugs became widely known.

"About 95% of my customers come in and say 'I don't want Vista,'" said E.G. Yang, owner of General Computer Systems in Oakland, Calif. "We even help people who bought brand name laptops downgrade to XP."

Some white box makers say that demand for XP was already there. Others say they are advising customers to avoid Vista for their own self-protection.

"I have a real hard time charging customers for fixing the same thing in Vista I did three weeks ago. So in that sense, Vista is really costing me money," said Ghysels, who doesn't expect to recommend Vista to customers until September next year at the earliest.

Viva la resistance?

The resistance to Vista was expected among big enterprises, who need to test hundreds or even thousands of applications for compatibility before moving to a new operating system.

That has proven true. Only 20% of the PCs sold via U.S. commercial channels -- think big corporate resellers such as Softmart or CDW -- in the first half of this year had Vista installed on them, according to the NPD Group Inc.

Meanwhile, less than 1% of the PCs sold from January to July in the U.S. retail channel had Windows XP on them, according to NPD. But scratch below the surface, and those numbers appear to obscure the growing resistance among consumers and SMBs to Vista.

For one, the traditional retail channel is much smaller today, as Dell pushed competitors to a direct sales model. According to IDC, retail sales comprised 30% of U.S. PC shipments in 1995. By 2005, that had fallen to 21%. Meanwhile, direct sales, including telephone and Web sales to consumers and SMEs, made up 55% of the U.S. PC market in 2005, up from 24% in 1995.

In direct channels, PCs can be much more easily configured to have either Vista or XP installed on them before being shipped to the customer.

After some early resistance, that is what leading PC makers are doing.

Large vendors are also attempting to placate buyers of higher-end versions of Vista such as Business and Ultimate by shipping XP installation CDs along with their PCs.

White box sales have also slowly fallen alongside retail sales. System builders were behind about ten million of the PCs sold in the United States in 2005, or about one-fifth of the market. That is down from 37% of the market in 1995.

Scale vs. service

White box makers lack the economies of scale and brand recognition of larger vendors. But like direct sellers, their strength is the ability to customize systems for customers. That has helped them win customers alienated by the Vista-only hardware lining the shelves of Best Buy or Office Depot.

Which is happening even in Microsoft's own backyard.

"We're definitely seeing some pretty big demand for XP, more than I remember seeing for Windows ME when XP came out," said Ted Paull, general manager of

Paull says almost 40% of its customers -- most of whom are consumers -- are picking XP over Vista.

"Vista is not everything everyone thought it would be," he said.

At Computer Concepts in nearby Bothell, Wash., about 30% of the store's customers are opting for XP, according to co-owner William Rutherford.

"At the beginning of the year, almost all of our customers wanted Vista," he said. "But that's been shrinking. Most of our customers -- who are not terribly techie, by the way -- have heard about a lot of problems and compatibility issues."

These anecdotes are probably no surprise to Microsoft. In July, Redmond ratcheted down its projections for Vista uptake. It now predicts that split between XP and Vista sales in its fiscal year ending June 30, 2008 will be 22:78, up from 15:85.

Microsoft is allowing system builders to pre-install XP until January 31, 2009. Big PC makers, by contrast, are cut off one year earlier.

But one PC executive told that "all" of the large vendors were "lobbying" Microsoft to extend the time they are allowed to install XP. That could help them buy time until after the release of Service Pack 1 for Vista, expected in Q1 next year. SP1 is a popular milestone signaling to IT managers that a given Microsoft product is mature enough to start testing and deploying.

Stephen Baker, an analyst with NPD, is not surprised that PC vendors may want this.

Large vendors "are only making 12% profit, not the same margin that Microsoft does," Baker said. "They want to satisfy customers any way they can."

But will Microsoft respond?

"Microsoft continues to listen to feedback from its customers and partners, but we have nothing new to say at this time about the sales lifecycle for Windows XP," a Microsoft spokeswoman wrote in an e-mail.

Robert Danese, executive director of NASBA, a trade group representing 14,000 PC system builders and resellers in the United States, did not return requests for comment.

But system builders say they anticipate strong demand for XP even next year, and that extending the XP cutoff date for large vendors -- without also extending theirs -- would remove one of the few competitive advantages they still hold.

"We're in a catch-22,"'s Paull said. "We sell Fujitsu and Toshiba notebooks, so we would like to be able to meet customers' needs [for XP] there. At the same time, we'd like to be able to keep at lest some business customers in our back pocket."

Copyright © 2007 IDG Communications, Inc.

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