Microsoft Hit With Suit Over XP ‘Downgrade’ Fees

For Microsoft’s legal department, as Yogi Berra once said, it must seem “like déjà vu all over again.”

The Redmond software giant is already enmeshed in a class-action suit over whether it mislead people who purchased PCs prior to the launch of Windows Vista — the so-called “Vista Capable” suit.

Microsoft’s (NASDAQ: MSFT) lawyers are also dealing with recent European Commission rulings against it for anticompetitive practices, including illegally tying Internet Explorer (IE) to Windows.

Now, the company is under antitrust attack again, this time for the fees PC vendors charge to consumers who buy PCs preinstalled with Vista and then “downgrade” to Windows XP.

The suit, which also requests class-action certification, was filed Wednesday by Emma Alvarado of Los Angeles County in federal district court in Seattle. Alvarado claims that she bought a Lenovo PC last June that came with Vista preinstalled, and had to pay an additional $59.25 to have the system “downgraded” to XP.

“Microsoft has used its market power to take advantage of consumer demand for the Windows XP operating system by requiring consumers to purchase computers preinstalled with the Vista operating system and to pay additional sums to ‘downgrade’ to the Windows XP operating system,” the suit alleges.

The suit claims that Microsoft knows it can charge extra for XP downgrades, so it must be raking in the loot. Initially, Microsoft had said it planned to halt access to XP for system builders and OEMs beginning June 30, 2008, but since relented. It then extended that availability several times. Microsoft now plans to end access to XP as of July 31, 2009, with the exception of its use in netbooks.

“These extensions were likely due to the tremendous profits that Microsoft has reaped from its ‘downgrade’ option,” Alvarado’s suit alleges. “To date, nearly one in three consumers purchasing a new computer has paid to downgrade the operating system from Vista to Windows XP.”

Analysts, though, say Microsoft is trying to kill off XP, because the system is already more than seven years old and still requires maintenance. That contributes to the company’s expenses because it has to maintain a separate set of code for XP.

At the same time, Microsoft is preparing to roll out Windows 7 later this year. Windows 7 will also become the operating system offered on netbooks, according to comments given by the company since last fall.

Microsoft spokespeople did not have an immediate response to the lawsuit, saying they had not yet been served with the suit.

However, Microsoft spokesman David Bowermaster did tell that the company doesn’t get any of the money from Vista-to-XP downgrades.

“Microsoft does not have a downgrade program,” Bowermaster said in an e-mail. “It does offer downgrade rights as part of some Windows Vista licenses, including Windows Vista Business purchased through the OEM channel.”

“Microsoft does not charge or receive any additional royalty if a customer exercises those rights,” he added, “Some customers may choose or need to obtain media or installation services from third parties to install the downgrade version.”

That seems to indicate that the extra charge is imposed by the PC vendor, since Microsoft doesn’t build PCs — not yet, at any rate. A partner at Terrell Marshall & Daudt, the law firm representing Alvarado, did not return a call for comment by press time.

Two veteran Microsoft watchers expressed skepticism about the strength of the plaintiff’s case.

“[Downgrading] sounds like a user preference to me,” Richard Shim, research manager for IDC’s PC team, told “If an automaker quits building the model of car that you like, can you sue?”

Rob Enderle, principal analyst at the Enderle Group, agrees.

“I don’t think the suit has any merit,” Enderle told “Why can’t you charge more for something you’re trying to discontinue?”

Their evidence is Microsoft was price fixing within Microsoft,” he added. “You can’t collude with yourself.”

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