As I understand it, Firefox on Windows XP would have the same problem as Internet Explorer on Windows XP in that it's limited to the codecs that come with the operating system.
A valid concern. That accounts for 3.12% of my users. Add that up with 10.32% of my users who are running IE on XP, and it is still only 13.44%. That number will dwindle away quick enough though. It's been dropping at a fairly quick pace, however. Videos typically aren't absolutely necessary on my site, so if 13% can't see them, and they refuse to either upgrade their browser, or their OS, then that is their choice. It's a large enough chunk that I will leave the current system in place, but I will likely just encode for h.264, and if their browser doesn't support it, then I'll swap out the video tag for a flash player with videojs for now. I'll revisit it in a few months, and any new video going up will be h.264 only.
Even the latest version of GNU/Linux doesn't come with an AVC decoder because of the patent problem. If by "upgrade" you mean switching from GNU/Linux or old Windows to new Windows, you have just turned your site into a pay site if it wasn't before.
True, firefox for linux may not work, but you can always switch to Chrome. I get 0.47% of my traffic from linux, so the few that want to run firefox on it won't be able to view video. Oh well.
I thought Chrome was dropping AVC support as well [chromium.org] due to royalties.
That was 2.5 years ago, and they still haven't dropped it. I suspect they won't, but they could. I'll deal with that (or users can complain to google if they want) when it happens.
Or switch to a competitor's site.
Fortunately, I don't have any competitors worth mentioning, so that's not really a concern at this time, but I realize it might for quite a few web developers out there.