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

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.

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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 has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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32 comments
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  • Now if I could pay $15/year to keep Windows running ....

    I would be happy and MS would have a "steady" yearly cash stream. Unfortunately, the current setup is, "pay me now, enjoy later (maybe)".
    With the pay me now scheme, there is no incentive to keep me happy once I am scalped. The only option is to wait for the next "pay me now" cycle.
    kd5auq
    • True cost of ownership? Not $15!

      Given the amount of productive time lost each year due to Windows updates, go-slows, crashes and the like, a true cost of ownership for Windows of $15 a year is a total pipe dream. The cost would be at least one, more like two to three orders of magnitude greater than that. Especially if you have to pay some pimple faced MSCP to do your support.
      SteveCarr
      • What Windows are you using?

        I have had all manner of windows running on various machines... and I have had almost NO downtime in the last few years. I have real paid-for versions and have set my updates to 'auto' (and at 3:00 am) and I have a good free Antivirus program.

        I have had no issues with updates or outages.
        Fark
        • The one most of us are using...

          I don't know what Windows YOU are using but my work PC is up to date and is as slow as a snail stuck to duct tape. I experience plenty of downtime and always have with just about any Windows machine I come across.
          storm14k
      • omg!! what are you talking about?

        I've had windowsXP running on a computer for over a year and a half running free AV and not once had to work on it. Also, running Windows7 on another PC. I push both computers hard with high-end games and both are very solid and do not have to do anything to it either.

        I've had no crashes, no downtime.

        What are yo doing to your computers??
        sunflier
        • What are YOU talking about. The average consumer has tons or problems

          Two computers run by a professional that knows how
          to keep out of trouble, and what he should not click
          on, does not a sample make.
          DonnieBoy
          • Where are the major problems?

            Honestly, among about twenty computers running
            XP scattered about my family and friends none
            of them have had more than minor problems in at
            least three years. I read posts like yours but
            even when I talk with other "techie" friends
            who help their family and friends we have no
            idea where you get so-called statistics like
            "tons of problems".

            Sure, there will always be problems. No product
            in any field is perfect. But I could list 100
            families, less than a dozen of them with real
            tech experience, running XP without hitches.
            reichart67
          • I love these Windows utopia posts...

            I guess all these PC support companies just make money by twiddling their fingers while everyones systems just hums along with only minor problems. Yea right. All I need to do to find a Windows PC with problems is turn to the nearest person and say "let me see your PC". I have a guy that works with me that almost every day has someones laptop with him that he's been asked to fix.

            Windows = Problems.
            storm14k
          • Maybe he's not too bright a guy?

            If he's setting them up, maybe thats the reason they keep comming back?

            I still have yet to see all these tons of problems the ABMer's claim all their "friends" or "co-workers" have.

            The only time I see any problems with a Windows machines is when someone gets one with crapware loaded at the factory (or with HP Digital Imaging Software).

            Once removed, I never see their computers again.

            I also get a person or two with Linux problems, and OSx issues, which isn't good considering the small percentage of users they have compared to Windows users.

            So, Windows=No Real Problems.

            No stories, just facts.
            AllKnowingAllSeeing
          • And then...

            ...there are the volumes of "Windows distopia" posts that you make.

            Seems they balance out pretty well.
            M.R. Kennedy
          • A Major Problem with Windows is the Price

            Amazon sells Windows XP Home Edition for just $225 apiece. The cost of installation on your 20 computers would be $4,500.

            When it comes time to upgrade those computers to Windows 7, an upgrade from XP to Windows 7 Home Edition will cost you $120 per machine, or another $2,400 for the 20 machines.

            And, should one of those old machines break down and require a new motherboard or significant upgrade, a new copy of Windows 7 must be purchased. Windows licenses are not transferable across machines - and a new motherboard counts as a new machine! (And yes, I'm aware you can petition Microsoft for special dispensation from the sin of trying to upgrade your computer). Also, since you purchased the upgrade editions of Win 7, you must keep your old XP disks around forever, in case you ever need to re-install Windows 7. Lose that old XP disk, and your Windows 7 upgrade disk becomes a $120 coaster with a hole in it.

            Ouch!!
            trentreviso
          • re: What are YOU talking about.

            And yet, you consistently push some form of Linux as the perfect OS for anyone, even non-professionals who don't have a clue as to what they're doing...
            M.R. Kennedy
    • Hit and Miss

      The computers that my spouse and I use are not a problem at all. I rarely do anything other than the manual updates (which is a personal choice, automatic updates would probably work fine). We use WinXP without any of the Microsoft add on programs such as IE or Media Player, etc.

      My children on the other hand...

      I have to fix their computers all the time, even with anti-adware and anti-virus software. In a way its my own fault for not enforcing the use of limited user accounts over administrator accounts, but on the other hand, a lot of software doesn't run well on limited user accounts (and on the Home version, its particularly useless). So, not entirely my fault I guess.

      Hans
      Looks Confused
  • Pitch Windows 7 to Netbook Market

    I think if MS was to encourage consumers to choose Win 7 over Win XP in the Netbook market (through ads, etc.) - and even have hardware manufacturers do the same, while they offer both OSs on low end systems - MS could do well.
    P. Douglas
  • MS will be increasingly pressured to lower prices, starting with netbooks,

    and then moving up the chain. Remember, Chrome OS is
    coming, and Windows is becoming less important every
    month.

    If Google would open a Win32 app store where they
    could certify against Wine, or run them in the
    cloud, that could remove a lot more barriers.
    DonnieBoy
    • MS lowering prices

      I would agree, with some amount of caution. I have an Acer Aspire One that came with WinXP home. The only reason I bought it with XP was so I could get the six cell battery and the larger HDD. I've been pretty happy with this system, except for the stupidity surrounding the Intel 3D video support in X (which is almost all Intel's fault).

      That said, I don't really see myself paying a premium for Win7. I still have an unused OEM copy of WinXP Pro for the next computer I get that I think needs it, or I'll put a copy of Linux on it (I'm thinking an ION based netbook here).

      My mother asked me the other day what I thought about netbooks, I told her I was generally happy with them. What I forgot to tell her was that I had seen several *notebooks* for sale recently for 350 dollars, that would be a better choice for her. I don't see how Microsoft is going to demand a premium for the operating system software for a $350 notebook (when you can get Atom based netbooks for under $250). I can tell you that they are going to have to reach my mother's price point, not the other way around: She will stick with what she has, rather than paying one cent more than she thinks she has to (which will be whatever she has to pay for the absolute least expensive option available).

      Regards,

      Hans
      Looks Confused
      • Yes, Microsoft WILL have to lower prices for cheap 15" Notebooks too.

        Microsoft wants to think they can charge you full
        price when the screens get bigger. That will not fly
        for very long. Especially after Chrome OS is out.
        DonnieBoy
    • Excuse me? Which parallel universe are you in again?

      First, Windows general marketshare is around 92% - where it's been for decades. Apple took a bit of share away in the US, but worldwide, it's almost a negligable loss.

      Linux has had virtually ZERO impact on desktop systems. Even in servers, where Linux has a much better shot, after making a significant impact, Windows has been slowly regaining lost ground.

      And this was during the Vista period - the hardest time for Microsoft in a long time. Win7 is shaping up to be a big hit.

      ChromeOS isn't even a real product yet and you're anticipating that it will have a huge impact when there's no good evidence that it will have any impact at all! I mean really - we've been down the 'Desktop consumer Linux' path over and over - and so far, no one has come up with a compelling case for it.

      Your WINE arguments show the problem. You want (or need) for Microsoft to be gone. So you come up with 'equivalents' for Windows and voila - no one needs Micrsoft. Unfortunately (for you), that's not how it works in the real world. There are a ton of 'comfort' issues involved which you're dismissing - but you don't determine what the consumer wants; the consumer does.

      They want familiar - they want support - they want to know they can install whatever they want to run and not have to deal with weird intermediary steps like WINE.

      Seriously, go review the entire Linux on netbooks experience and learn from it. People ARE willing to pay a premium to use Windows - everyone who buys a Linux netbook and takes it back to get the Windows one - even if it costs $50 more - is telling you this. Every Mac user who pays hundreds more to get Mac tells you this.

      Cheap isn't the only driving factor. Free isn't actually good enough. And on that, I point you at the famous Borland experiment in the 80s where they dropped the price of Turbo Pascal over the course of several months and found that sales increased as the price when down - until it hit a certain price - then sales DROPPED as the price continued to go lower. At a certain point, cheap stops being a bargain because people perceive a lack of quality or value.

      Finally, the idea that the browser is the new desktop is entertaining, but it's just not going to fly (and sadly, it's clear that we'll have to sit through this over and over until the pundits get it right). There are real world limitations to what you can do over a wire (or worse, WiFi or WWAN) and the cost of remoting everything is far, far higher than the fans of Web 2.0 want to admit.

      Besides, ChromeOS isn't really a browser OS - it's Linux cripped to run just one app (kinda). To get a sense of how well that works - check out Linpus or Moblin.

      Sorry - rant all you wish, what you believe should happen is not what will.


      TheWerewolf
      • Oh, Please! Stop the FUD

        GNU/Linux runs on about 10% of PCs. M$ has admitted to 7%. Growth rate is huge.
        pogson
      • Netbooks are a problem for MS

        If you think of using MS Office, than the price of a netbook goes up drastically. The fact is that a Netbook is mainly used for web browsing. In this scenario, one can use Open Office or Google Apps for document editing and keep the price down.

        Netbooks will cause MS to get less revenue and depress their stock even further. Cloud computing is on the horizon and even MS sees that (Azure platform). With ChromeOS, netbook will boot in two seconds and the whole experience will be better than on netbook runnin Windows. All this spells lower prices and more competition for MS. Time to sell MS shares...
        prof123