How much is Windows worth?

How much is Windows worth?

Summary: If you walk into a retail store, you'll find shrink-wrapped copies of Windows on the shelves for as much as $299. But these days, you can a whole PC for that amount of money. As a result, consumers have a distorted view of what Windows should cost. Do Microsoft's artificially high retail prices encourage piracy and discourage legal upgrades?

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TOPICS: Windows
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Years ago, Microsoft created a multi-tier pricing structure for Windows that emphasized pre-installing its software on new PCs. The result was, by one measure, an outrageous success. So much so, in fact, that it led to an antitrust trial that declared the company a monopoly subject to governmental restrictions on its behavior.

Ultimately, Microsoft's confusing business strategy has led to a problem that threatens the success of its next version, Windows Vista. My instinct says consumers can't value an operating system at more than 10% of the value of the physical hardware.Historically, 9 out of 10 copies of Windows are sold preinstalled on new computers. The business model that Microsoft created has been so successful that the average consumer has no idea what Windows is worth. The notion that different purchasing channels have different Windows license restrictions is completely inscrutable. (How many questions can you get right in this quiz?) In fact, based on prevailing PC prices in the retail channel, I wouldn't be surprised if most consumers think Windows is essentially free.

Over the past two weekends, I researched prices of new PCs and retail copies of Windows. The results revealed a startling gap between what a pre-installed copy of Windows appears to be worth and what Microsoft charges when it puts the same software in a retail box.

 

Windows XP Home Edition: $30? Zero?

This weekend, I went unscientifically through the back-to-school ad supplements in my Sunday paper. Hewlett-Packard is selling a full computer system, with CRT monitor, keyboard, mouse, and printer, for $299? Yes, it's a loss leader, but it's the first product offered in the four-page HP supplement, and it sets the baseline for consumers. Office Depot has a Compaq system, also with a CRT monitor, at $299. At Best Buy, the entry-level system is $350. Dell's back-page ad shows an "amazing offer" on a back-to-school system for $279 with a free printer. You have to look carefully to see that the flat-panel display in the picture costs an extra $130, although that still only drives the price to a little over $400.

Every one of those systems includes an impressive amount of hardware, along with a copy of Windows XP Home Edition. So. what sort of value perception does that create for Windows? I'm sure someone has done the research, but my instinct says that consumers can't possibly value an intangible product like an operating system at more than 10% of the value of the physical hardware. Which means that the perception is that XP Home Edition is "worth" about $30, at most, to a consumer. And I'll bet many people assign no value to it. They just think Windows comes with the computer and don't even think of it as a valuable commodity.

Big-name OEMs reinforce this impression with their online build-to-order web interfaces.

At Dell, Windows XP Home Edition is worth $30. That's the discount you get if you purchase a Dimension 1100n with no preinstalled operating system ( a copy of FreeDOS is included in the box) for $269; the identical system with XP Home is $299; the same $30 price tag attaches to the Dimension 3100n ($429 with FreeDOS or $459 with XP Home) and the Dimension 5150n ($619 with no OS, $649 with XP Home).

 

Windows XP Media Center: $70?

For a few hundred dollars more, you can upgrade those crappy entry-level systems with higher-end hardware - LCD monitors, DVD burners, dual-core CPUs, a gig of RAM, and 200GB+ hard drives. Total cost is still ridiculously low, even with a premium version of Windows. The Best Buy circular offered a tricked-out $700 dual-core desktop PC with Windows XP Media Center Edition. Likewise, every vendor offers reasonably full-featured notebook computers in the $500-750 range, all with Media Center preinstalled. As with XP Home, I'm guessing that the perceived value of this premium Windows version for consumers can't be more than about 10% of the total system cost, or about $70.

Here, too, the big-name PC builders reinforce the impression. How much of a premium Is Windows XP Media Center Edition 2005 worth? If you upgrade an entry-level Dell PC like the Dimension E310 at the time of purchase, you'll pay $24. For higher-end systems, Gateway and Dell offer Media Center as the default choice, with no discount for a downgrade to Home Edition. In big box stores like Best Buy, Media Center is now the default OS on everything except entry-level systems.

 

Windows XP Professional: $149?

Given the back-to-school them, I was surprised to see OfficeMax selling a nicely outfitted small-form-factor system with Windows XP Professional for $650. For the most part, I found XP Professional offered as standard only on high-end PCs with high-end prices in the $1000 and up range.

The business version of Windows XP also costs significantly more as an upgrade with a new PC. In fact, prices from build-to-order shops were all over the map, in my research. To upgrade from XP Home Edition to XP Professional with a new PC, Dell charges $159 with a Dimension B110, $149 from XPS 700 or Dimension 1100/3100/5150, and a mere $124 from Dimension E310. Gateway wants $100 to replace Home with Pro on its DX310 or FX510. By contrast, Sony will only ding you for an extra $79 to add XP Professional on its Vaio VGN-SZ240. Toshiba charges the same $79 upgrade fee for its build-to-order Satellite U200. Lenovo's ThinkCentre A52 is the best bargain of all, at $70 for the XP Pro upgrade.

Dell's pricing really makes buyers of its n Series PCs feel like they're getting a bargain. The total cost of Windows XP Professional is $179 over the FreeDOS-equipped barebones Dimension 1100n, 3100n, and 5150n systems.

 

Shrink-wrap sticker shock

Want to build your own PC or buy from someone other than a big-name builder? Be prepared for sticker shock. You can shop around for slightly better prices, but this is what a reasonably savvy shopper will buy from well-established, legitimate resellers, give or take a few bucks.

XP Home: $81-199 A full retail edition of Windows XP Home Edition typically costs $199, regardless of whether you buy from a mail-order reseller like Newegg or direct from Microsoft. That's two-thirds of the cost of those entry-level systems, which include the exact same operating system, with different license terms.

The upgrade edition of XP Home costs $99 from the same channels and can only be legally installed if you have a full version of Windows 98 or Windows Me.

A single OEM copy of Windows XP Home Edition, which you can legally use to build your own PC, typically costs around $90 with shipping (last weekend Newegg was offering single OEM System Builder CDs for $89.99 and Mwave had the same package for $81). Most system builders will preinstall an OEM copy of XP Home for about $20 more than the cost of the software.

Media Center Edition 2005 isn't available as a retail product. But you can purchase a single OEM System Builder copy from a reseller, typically for about $20-30 more than the equivalent XP Home package. It's no accident that that number matches so neatly with the $24 premium Dell charges for the Media Center upgrade.

XP Pro: $131-299 The full retail edition of Windows XP Professional will set you back roughly $279 plus shipping if you buy from a reseller like Newegg, or $299 with free shipping direct from Microsoft. The retail upgrade is a rarely discounted $199, regardless of channel.

By comparison, OEM editions of XP Pro are a bargain. I found perfectly legal OEM System Builder copies for $131 (Mwave) and $137.99 (Newegg). As with XP Home, most small system builders tack on a surcharge of $20-30 to preinstall this version on a built-to-order PC (Newegg $109.99; Mwave, $119).

 

Microsoft's high prices

Avoiding channel conflict has always been a goal of Microsoft's Windows sales strategy, so it's not surprising that their direct-to-consumer prices are hard to find and hardly a bargain.

I already noted the direct prices Microsoft charges for upgrade and full copies of Windows XP (Home Edition costs $99 and $199, respectively; Pro is $199 or $299).

If you already own a retail copy of Windows, you can buy up to three extra licenses direct from Microsoft. (Sorry, OEM licenses aren't eligible.) The deal, such as it is, represents a $15 discount over the shrink-wrapped version. Each additional Windows XP Home Edition license costs $84 if you already own a full retail version or $184 if you own an upgrade version. An additional license for Windows XP Professional costs $184 if you own a full retail version or $269 if you own a version upgrade.

And then there's the Windows Genuine Advantage Kit, available direct from Microsoft and soon through resellers. If you have a pirated copy of Windows XP installed, you can "get Genuine" by paying $99 (XP Home) or $149 (XP Pro). The offer you get depends on what's installed on your PC. Most pirates use cracked or stolen volume license keys, which work only with Windows XP Professional, so few people are likely to see the less expensive XP Home offer.

 

What it all means

When I look at the Windows market, I see three fundamental implications for this disconnect between what people think Windows is worth and the much higher price tags Microsoft puts on the retail product:

Artificially high retail prices encourage consumers to unwittingly buy counterfeit software. I found it difficult to find discounts on retail copies of Windows XP. Most online resellers charge close to the same price as Microsoft does, which seems unrealistically high. Consumers are used to finding bargains through web-based comparison shopping services. The discounts they see match the values they perceive when they look through the Sunday PC ads. The trouble is, many of those copies are pirated or otherwise less than legal, which means they're more likely to fail the Windows Genuine Advantage validation sometime in the not-so-distant future and have to pay even more.

High retail prices discourage upgrades. If you've spent $2000 on a high-end gaming PC, you might be willing to pony up another $200 when Windows Vista rolls around, so you can get some of the new media and gaming features it includes. But will the average consumer with a $500-800 PC be willing to spend $200 for an upgrade? I don't think so. The magic number is more likely to be around $99, especially if there's a compelling new feature that isn't available with the old version.

There's no family value. Apple has an excellent idea, with a fixed $129 upgrade price and $199 family packs that can be used to legally upgrade up to five Macs. Of course, Apple has it easier than Microsoft, because they sell a copy of the base OS with every new computer (no resellers) and then have a captive audience for upgrades. But still, the price is right and the value of a five-pack license is unmistakable.

Back in my college days, I took Econ 101, and I've never forgotten the classic price-demand curve. Lowering the price usually makes customers happier. Sometimes, it makes companies more money too. Maybe someone in Redmond needs to crack those old textbooks and start slashing prices.

Topic: Windows

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223 comments
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  • I hate to say it, but...

    ...I would swallow hard and pay the retail price for XP Professional. When I buy a new computer, my first order of business is to wipe the hard drive totally clean. No pre-installed Windows, no other bloatware from the OEM. I then reinstall Windows XP using my retail copy. I pay more up front, but (1) I am in complete control of the contents of my hard drive, (2) I start right away with a clean installation, and (3) I am willing to pay a bit more to get (1) and (2). Indeed, I wish that OEMs or computer stores would simply sell machines with blank hard drives and a single retail copy of XP Home or Professional.
    kesgardner
    • Blank Hard Drives...

      [b]Indeed, I wish that OEMs or computer stores would simply sell machines with blank hard drives and a single retail copy of XP Home or Professional.[/b]

      Why not just build your own? Besides getting the EXACT computer you want, with the features you REALLY want and not some compromised substitute, you get that virgin blank hard drive, which is ready for installing whatever OS you want...
      Wolfie2K3
      • No such thing as a virgin hard drive that ...

        ... hasn't been written. There is data written to the hard drive during testing in addition to the formating information on the drive.
        ShadeTree
        • "New" disks may even have others data

          I bought a new Acer laptop and found someone elses data already on it. The explanation from Acer is that they recycle disks under warranty.
          tony@...
  • Chicken and egg

    As long as they're trying to avoid competition with their channel and they keep their retail prices high, then that 90% figure will continue. I'm not so sure it's a good policy, though.
    Ed Bott
    • Thinking it's more or less the way Redmond likes it

      I've assumed for years that Microsoft are bright guys and they focus test pricing scenarios and figure out the price points for the various channels that maximize profit. Back when XP was nearing release, everyone who cared vehemently disliked product activation, but I thought Microsoft had figured the odds were small that this would significantly reduce the bottom line. They were more right than wrong on that one.

      So I think the high retail price is about selling new computers bought from Microsoft partnered OEMs. And that would suggest that the 90% guesstimate is probably the way Microsoft likes it. Have you noticed how difficult it has become to buy an OEM license and transfer it to a different piece of hardware when recovering from a catastrophe (or even to significantly upgrade the machine you bought)?

      Hmmm. I said profits in that first paragraph. Revenues would be a much better word. I wonder, given its unexpected development delays when Vista will actually return on investment. But I digress.
      DannyO_0x98
      • WRONG!

        when you go to Fry?s for an OS, what do you see? For the PC, there?s only Windows. No other choice. So they can charge what they want because there is no competition. And the OEM?s, what choice do they have? Until recently Linspear started becoming a viable choice, not a great one, but a choice.
        mypl8s4u2
        • Really?

          Funny thing is that, when I go to Fry's, I always see at least one prebuilt Linux box available (not much, I grant you) on display, and I see available to buy the following: Red Hat, Xandros, Linspire, and Suse, and I think a few others. If you are not finding those at Fry's, then you are looking in the wrong places (or my Fry's has more than your's, take your pick).

          Either way you cut it, the point is moot, because noone but those who really know what they are doing will likely chose anything other than Windows. Heck, I know a fair amount, and I still use Windows. Will I buy Vista? Yes. Why? Because I need to keep up with technology, and in three or four years, 90% will be using it, bad EULA and high price or not, because it is what 90% of computer users know.

          Linux may be free, but people have proven time and again that they will pay more for something that is easy, that they don't have to relearn, and that is what they already know. In that, you are right...Microsoft could just about charge whatever they want, and people will pay it rather than learn something else.
          Laurel Raven
    • Hmmm, seems to work nicely for them.

      "I'm not so sure it's a good policy, though."

      Given the revenue it generates I would have to say it's working for them.
      No_Ax_to_Grind
  • Sure it matters?

    Although I have to agree that for many people it doesn?t matter, there are quite a few people it either does, or will eventually matter too. The bottom line still is in any case that it matters because it?s a screwed up pricing system.

    What makes it worse for the general public is that a great many of them do not know just how screwed up the Windows pricing scheme is. Consider it?s going to be just about impossible to get your hands on a new legitimate copy of XP for less then $100, and just about without fail its going to cost more then that. Now also consider that one can download and burn off a copy of Linux for the price of a blank CD. Now admittedly, Linux is not going to do the job for many people, if they like games, or just are not computer savvy enough to cope with command lines etc etc then they are going to need XP. But Linux would suffice for many, and in some ways it?s so close to almost ?being there? for many people. How can one ever justify the price difference? We are not just talking ?some percentage? more expensive for XP, we are talking virtually 100% less expensive for a Linux OS, free as opposed to at least $100+ for XP. This is a price difference of monstrous proportions.

    I have heard lots of talk about possible pricing schemes for Vista, and they have me almost laughing. It seems to me, to be a fact that unless Vista comes included with a pre built machine, at the low ?discounted? prices quoted for XP in the article that only a small portion of people will upgrade to Vista if copies cannot be obtained for well under $200 a piece. If MS starts talking $200 a copy or more for Vista, you can bet your bottom dollar that the OS upgrading to Vista market will be found to be very very dry indeed. The fact is that XP, even with all its security foibles, and WGA and whatever other issues the Linux lovers like to go on about, is actually still such a good OS that spending $200 on a new OS just will not be in the question for most people.
    Cayble
    • How is that any different than say car tires?

      GM pays an average of $5 to $6 dollars for a new tire for their cars due to the volume. You and I pay $100 or so for a decent tire. (Mine are actully around $200- $250)

      How is this any different?
      No_Ax_to_Grind
      • One way, maybe...

        ...is that car tires wear out and NEED to be replaced.

        Your OS doesn't wear out, and can usually be reinstalled (for free) if you encounter serious problems.

        I don't think a lot of people understand what an OS does, so it would be difficult for them to see why it's worth $200+, if their current computer is not having problems doing what they want.
        brble
      • Easy, what's the rating?

        Some tires are considered ?Z?, ?N? rated and some are low profile, and some grip better in certain weather. You have Dunlap, Goodyear, Yokohama, Prellie, Remmington, and a host of others. If I buy a generic 205/75 R14 compared to say a Perelle 255/55 R14 Z rated, directional, low profile, rim still the same, of course I?m going to pay more, it?s a better tire. <p>

        But you can?t compare the flavors of Windows, it?s all the same regardless of version, it?s sort of like the name ?tire?, totally meaningless and void of description. Vista is XP in a suit. They even tell you, you can upgrade on line for more ?bells and whistles?. I want better performance, and for what I?d have to invest for that performance, I?d rather stick with a fast machine and run XP. <p>

        When I go to the store, I have no choice, Windows or nothing.
        mypl8s4u2
  • Another weird-Ax knee-jerk response

    [i]"As you said, very few people actually buy a retail version "[/i]

    Doh! The article explains why that is so: Microsoft deliberately inflates the retail cost of their software so that people would rather buy a new PC than "upgrade" their current PC.

    [i]"THe other thing that yoiu must consider is that as MS sells 90% of their installs to OEMs,"[/i]

    Err, the article [b]did[/b] consider that - did you actually read it? It is a consequence of the statement above - did you even read what you wrote?

    [i]"they do noit want to be in competition with their biggest market. With high retail prices they aren't."[/i]

    Again, mentioned by the article - are you just a parrot? In favour of market collusion? So much for free minds and markets.
    Fred Fredrickson
    • Did you have a point of any kind what so ever?

      Or was it just a useless rant? Look, I am always amazed when no bodies (in the size of their comany sense) says they know more than MS about how to price a product. Microsoft's pricing seems to be working quite well for them.
      No_Ax_to_Grind
  • More axes than I've ever seen

    You really should consider changing your username. You have more axes to grind than I've seen in a single person, including my sister-in-law. :-)
    spamagnet
    • Your family problems are not my concern.

      There was no ax grinding, simply a response to the article that was neither pro/con Microsoft.
      No_Ax_to_Grind
      • It's called humor (n/t)

        ...
        spamagnet
  • For once we agree

    Any vendor is welcome to sell any product for any price they choose.

    That you can buy Windoze on a computer for $35 or off the shelf for $200, well, if they want to sell more off the shelf, they will drop the price.

    One advantage of the high shelf price is that whatever "deal" price you get with a system looks like a bargain, which helps the computer sales force claim that you get hundreds of dollars in software, "so it's like getting a free computer!"

    It's good that manufacturers let you buy computers without Windoze, so that people can decide what they want to do -- we can load Linux, they can load a legitimate copy of Windoze (and hope that WGA works when they need to reload it) or they can load bootlegs of Windoze (and take their chances).

    One of the things which MS did to kill off superior OSes (such as OS/2 and DR DOS) was to force mfrs to buy a copy of MS-DOS and Windoze for every CPU sold, or not be able to buy MS products for any of the CPUs they sold. The high price of their products even then helped them pressure the builders into toeing the line. Even with that pressure, OS/2 sold over a million copies to the desktop and Linux was born and began its rise to dominance as the primary alternative OS for the Intel platform.
    critic-at-arms
  • Sure it does

    Your statement does appear to match MS' existing behavior, but this means that MS has little incentive to serve the needs of the end user and every reason to encourage sales of new hardware. Easiest way to encourage sales of new hardware is to reduce the efficiency of each new release so as to discourage people from running new versions of Windows and MS-Office on their existing (slower) hardware.

    Don't know if MS actually does that, but they don't really have a compelling reason to reduce bloat. After all, selling to end users is only a sideline.

    As I've said for years: the people who pay are the customers.
    John L. Ries