Wall Street still worrying over netbook impact on Microsoft's Windows 7 sales

Summary:No matter how many times Microsoft officials claim that they believe the company will be able to charge premium prices for Windows 7, even on netbooks, Microsoft watchers ask again about just how elastic Windows' pricing really can be, given that netbooks go for a few hundred dollars.

How much will netbooks dent Microsoft's Windows sales?

It's a question that continues to preoccupy many a Wall Street analyst, especially as Microsoft marches toward the October 22 launch of Windows 7. No matter how many times Microsoft officials claim that they believe the company will be able to charge premium prices for Windows 7, even on netbooks, Microsoft watchers ask again about just how elastic Windows' pricing really can be, given that netbooks go for a few hundred dollars.

On September 9, the netbook question arose again during a question and answer session with Microsoft Chief Financial Officer Chris Liddell at the Citi Annual Global Technology Conference. Analysts asked Liddell the same-old: When Bing will actually give Google a run for its money; whether Microsoft would be able to continue to control costs; whether and when Microsoft will do stock buybacks (yes and in the coming months, Liddell said).

But analysts seemed most interested in the netbook issue. How can Microsoft predict that the continued popularity of netbooks, which comprise a fifth of the portable PC market (according to a recent market study), isn't going to force Microsoft to charge less per copy of Windows, rather than more?

As expected, Liddell didn't share details about how much Microsoft is planning to charge PC makers per copy for Windows 7 Starter or Windows 7 Home Premium, the main two SKUs expected to show up on low-end netbooks. (Word is Microsoft charges about $15 per copy for XP on netbooks.) But he did share more about why he said he isn't worried about potential price erosion with Windows 7.

First, Liddell said that he believes netbooks, as a category, are "maturing." They aren't topped out yet and, according to Microsoft's calculations, represent about 10 percent to 15 percent of the overall PC market. But they are likely to grow a percentage point or two higher, at most, he told Citi conference attendees.

Secondly, Microsoft is planning to continue to offer PC makers the option of licensing Windows XP "for a period of time," as well, he said. That could appease the makers of some of the lowest price-point netbooks, at least for the time being. (Microsoft has said that OEMs will be able to license XP Home edition through June 2010 or one year after general availability of Win7, which I'm assuming means October 2010.)

Liddell reiterated Microsoft's claim that 92 percent to 93 percent of netbooks are now going out with Windows XP, not Linux, attached. He said that proves that people are willing to pay at retail a premium of $30 to $40 per copy for "the Windows experience," even when offered an alternative that is free. He acknowledged Microsoft won't ever get to the 100 percent preload "attach" with netbooks, but even in the bargain segment, there is a group of people willing to pay for the familiar Windows experience -- especially those netbook users who care more about the small form-factor benefits than the cut-rate price tags.

How Microsoft thinks about the actual cost of Windows was the part of Liddell's remarks I found most interesting.

While Microsoft charges multiple hundreds of dollars for a new copy of Windows, Liddell said the actual cost is $15. Here's how he calculated that number: The average selling price for Windows (when figured across all versions) is $60 per copy, he said. The average user sticks with a particular version of Windows for four years. So the cost of Windows isn't really $249 or even $99. It's $60 divided by four, or $15 for a "one year experience." And if you compare $15 to the cost of having to learn a new OS or port your apps to a new platform, Windows looks downright cheap, Liddell said.

Hmmm. I'm not really buying Liddell's new math. It'll be interesting to see if any company watchers are finally appeased by his netbook assurances. Are you?

Topics: Microsoft, Hardware, Mobility, Operating Systems, Software, Windows

About

Mary Jo Foley has covered the tech industry for 30 years for a variety of publications, including ZDNet, eWeek and Baseline. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008). She also is the cohost of the "Windows Weekly" podcast on the TWiT network. Got a tip? Se... Full Bio

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