Dell Notebook - W7 Ultimate downgrade to W7 Premium

Good friend of mine has a Dell Studio Laptop 1737 / running Vista Ultimate purchased 2009 during Vista to W7 transition. HDD went out about a month ago and purchased a new drive via Dell (warranty period expired). For his trouble they threw in a copy of W7 Ultimate. After installing drive and OS, notebook ran fine but over time OS required license key code. He called Dell for key code and sales said they made a mistake per W7 upgrade and would send him a Vista install disk WITH key code.
QUESTION ... If he purchases a OEM copy of W7 Premium (Legal copy from Newegg/Amazon) can he just enter it's license key and the current installed ULTIMATE version automatically downgrades to PREMIUM ..
OR
Must he reformat/install the new OEM W7 Premium and then enter license key?

 

Thanks for the quick reply Arie .. was afraid that would be the answer.
Friend is still undecided if he will purchase W7 (kids want W7) or downgrade back to Vista via Dell's free solution. Since BOTH directions require a format/install guess it will be down to who's paying the bill. I did suggest if they plan on selling this notebook in the next year or so, W7 installed would provide much better street appeal / faster sale.