Windows 7 OEM pricing: What could and should Microsoft do?

Windows 7 OEM pricing: What could and should Microsoft do?

Summary: The most misunderstood and closely guarded piece of the Windows pricing equation, in my view, is OEM pricing. A June 12 report on OEMs allegedly balking at Microsoft's planned Windows 7 pricing is fanning the flames.

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Microsoft still has yet to go public with its Windows 7 price list. But that hasn't stopped customers and partners from publicly hoping for the best (cheaper than Vista) and fearing the worst (any kind of increase over the cost of Vista).

The most misunderstood and closely guarded piece of the Windows pricing equation, in my view, is OEM pricing. A June 12 report on OEMs allegedly balking at Microsoft's planned Windows 7 pricing is fanning the flames.

More than a decade ago, the U.S. Department of Justice forced Microsoft to standardize Windows pricing for its top 20 PC maker partners -- to stop the company from using pricing as a weapon via which it could charge higher prices to "punish" OEMs who deigned to carry other operating systems. But that still doesn't mean OEM pricing is "simple."

In the good old days, Microsoft could get away with upping the per-copy OEMs price for Windows by $15, $20 or more over the previous version, claiming that it was providing PC makers with more and more functionality with each release. But today, Microsoft is actually removing previously bundled Windows features -- everything from Internet Explorer, to Photo Gallery, to Media Player -- in order to head off current and potential antitrust suits. Should the company be charging PC makers more for a new version of Windows that includes less functionality?

Then there's the added complication of netbooks. In order to thwart Linux, Microsoft has chopped the per-copy price it charges for Windows XP for netbooks to an estimated $15 per copy, according to various sources. With Windows 7, Microsoft is believed to be attempting to reduce the number of machines that will qualify for netbook status by setting maximum specs (10.2-inch screen size, no hybrid drives, etc.).

DigiTimes claims Microsoft is floating a per-copy price for Windows 7 for netbooks of $45 to $55 -- a claim I find somewhat dubious, given that DigiTimes is reporting that XP currently goes for $25 to $35 a copy for netbooks, rather than $15. Maybe the prices DigiTimes is citing are for OEMs who aren't in the Top 20 tier?  Or maybe those are the per-copy Windows prices it is planning to charge OEMs for non-netbook machines?

There's another assumption related to the June 12 DigiTimes report that I believe is off-base.

Many industry watchers seem to be assuming that PC makers "pass along" higher operating system costs to their customers. The thinking: Netbook makers' margins are so tight that even a few dollars more for a new operating system would be rejected outright by the OEMs.

However, if history is any indication, this may not be a safe assumption. In the past, when Microsoft raised Windows prices, PC makers simply ate the higher costs. Consumers weren't willing to pay substantially more for a new Windows PC just because it happened to be running the latest and greatest version of Windows.

If Microsoft were to up the $15 per copy price that it is believed to be charging netbook makers for XP to, say, $20 or $25 per copy for Windows 7, I think netbook makers would bite the bullet and pay it ... at least until they amassed enough evidence that consumers would be equally happy to buy Linux/Android netbooks as they have been more familiar Windows-based ones.

Microsoft should be unveiling Windows 7 consumer prices by next week at the latest, given that the Windows 7 Best Buy promotional campaign is expected to kick off by June 26. That means there might be some new leaks about what the company is planning to charge its OEM partners per copy for Windows 7, too.

What do you think Microsoft could -- and should -- do around Windows 7 pricing? If you were Microsoft's Chief Windows Price Setter, would you hold Windows 7 pricing steady, increase it slightly, or come in on the low side?

Topics: Software, Hardware, Microsoft, Mobility, Operating Systems, 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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131 comments
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  • Bigger flaw in the analysis.

    We're talking about the per-copy price of Win7 as if it were a fixed amount, which it probably is - but the tacit assumption is that the price of the netbook it's running on is *also* a fixed price across all netbooks, which it isn't.

    Netbooks range from $199 to $799. If Windows goes from $15 to $55 (the worse case scenario), then it adds about $40 to the price. On $199 that's significant, but on $799, it's not. So this really only affects the cheapest models.

    But it's not even that simple. Price alone is not what decides which model a consumer will purchase. If it was, everyone would be buying the $199-$299 Linux based models. However, that's simply not the case.

    In fact, Linux models already tend to be around $25 - $50 cheaper for essentially the same device and people are still choosing Windows over Linux in huge numbers.

    It's not Linux Win7 will be competing against, it's WinXP and once Win7 ships, WinXP won't be on the table anymore. Which means there's be a short transition period when people will see WinXP models slightly cheaper than Win7 models, and then the choice will go back to Windows or Linux (unless Apple pops up with something).

    The REAL question is going to be "Win7 Starter or Win7 Premium?"
    TheWerewolf
    • Agree - the real competitor in netbooks is XP

      I see the cheapest netbooks shipping with XP and the higher priced netbooks shipping with Win 7. If MS really wants all of them to use Win 7, they will have to bring the price a LOT lower than $55 per unit.
      BillDem
    • You said ...

      ... "In fact, Linux models already tend to be around $25 - $50 cheaper for essentially the same device and people are still choosing Windows over Linux in huge numbers."

      But, from what I have seen, Linux models consistently have less RAM and very small SSD drives instead of medium sized hard drives found on Windows netbooks. Not only does this cut into Windows battery life, it means that OS pricing has almost nothing to do with the the difference in price between Linux and Windows netbooks.

      Your point though remains intact. Windows remains the overwhelming choice of users. Windows XP is dead and everyone knows it. RAM is cheap and Windows 7 runs on 1GB sub-2GHz single-core processors. Further, having no AERO option makes Starter Edition a sub-standard choice. Starter Edition on netbooks will be short lived.
      M Wagner
      • reason for choosing Windows over Linux

        You pointed out in your comment that the Linux models are coming with a small SSD and less RAM. Maybe you should read your own post for why Windows netbooks are getting chosen instead of Linux ones.

        By the way, when you choose a Linux netbook, how much crapware is it filled with that must be removed in order to attain that price point?
        tmsbrdrs
        • Linux and MacOSX are free from ...

          ... crapware because they are ALLOWED to control what is installed on their systems. The MS-DoJ Consent Decree FORBIDS Microsoft from such "interference" with the OEM. CRAPWARE is an unfortunate "unintended consequence" of the Consent Decree.

          If customers are choosing better hardware then so be it. They are not paying a premium for Windows, they are paying a premium for better hardware.

          Frankly, I think Linux and Windows should be sold SIDE-BY-SIDE on identical hardware. The results might be enlightening for all parties and it would truly level the playing field.

          But who is going to tell Dell or HP they have to sell something that they perceive that too few people want. Who is going to tell Wal-Mart they have to stock it?
          M Wagner
          • Now why do you think that is?

            '[i]Frankly, I think Linux and Windows should be sold SIDE-BY-SIDE on identical hardware. The results might be enlightening for all parties and it would truly level the playing field.[/i]

            Why do you think that's not happening?

            [i]But who is going to tell Dell or HP they have to sell something that they perceive that too few people want. Who is going to tell Wal-Mart they have to stock it?[/i]

            I imagine the government will, if they find M$ is still engaging in the same nonsense they were engaged with 10 years ago.
            Wintel BSOD
          • Ideology and facts

            Don't know where you two were, but it already happened. The response was so low that they discontinued Linux. So how is an ideologue going to deal with these facts?

            Say they didn't do it right, because anyone would choose a 20C OS over a modern one right?

            Facts are such a pain when you're an ideologue.

            ;-)
            tonymcs@...
          • I'm not too worried about the future

            [i]Don't know where you two were, but it already happened. The response was so low that they discontinued Linux. So how is an ideologue going to deal with these facts?[/i]

            And I'd like to know why that is. Response too low? Gee, it was doing just fine until M$ pulled XP out of mothballs and started installing them on netbooks for next to nothing. Then all of a sudden we don't see Linux on the shelves anymore.

            [i]Say they didn't do it right, because anyone would choose a 20C OS over a modern one right?[/i]

            You mean like it's currently being marketed? On half-a$$ed, inferior hardware? That is, if you can find it at all.

            [i]Facts are such a pain when you're an ideologue.[/i]

            I believe with a new Administration in Washington, we'll begin to see that change. No more free-rides.

            That's my ideology. ;)
            Wintel BSOD
          • I Totally agree

            I had a racking in the shop nearly full of Linux returns customers just don't want it 90% brought it back claiming it wasn't fit for purpose. Very expensive campaign that fell on its arse.
            Richard Turpin
          • Why XP netbooks get a hard drive, not SSD...

            Maybe the simple answer - XP just doesn't fit onto an 8 GB SSD with all the bells and whistles. There's not much room left over.
            Wolfie2K3
          • "Who is going to tell Wal-Mart they have to stock it?"

            You will.
            Tynach
          • Linux is not visible to the consumers

            The problem is that as lokn as there is no market force behind Linux, it will not hit the shelves. One reason Windows sell is that Microsoft actively use resources (a lot) to make the consumers buy their product. Linux? Never seen a Linux ad outside of the Linux manazines.

            The only way to get the consumers to buy PCs with Linux is to tell them that it exists. Before they go to the shop. And that is not Dell or Lenovo or other PC makers job. That is the job of those who create the software.

            Point to prove it: Apple sell (more and more these days) PCs that are generally more expensive than their Windows based equivalents (I know, I bought one). How can they do it? Smart marketing. Make consumers aware it is there and that it is different.

            How about somebody someody try to do the same for their Linux distribution?
            InnocentBystander
  • What should MS do?

    Well this is two parts...should and probably will happen.

    First, what [b]should[/b] Microsoft do? Well to start reward those who paid for the highest sku [READ: Vista Ultimate] and offer it for say $29 or something highly attractive to make up for the Ulimate Extras blunder. Then take the rest of the skus and offer special "Vista" pricing - say 25-30% off the shelf price - again spreading good will and use it as a catalyst to move people beyond Vista so the ABM crowd can stop dragging its name through the mud.

    Now what probably wil happen? Ultimate will be $199 upgrade/$349 Retail, Business $129 upgrade /$299 retail, and Home Premium will be $99 upgrade and /$199 full retail.

    Vista Ultimate skus only may see a 20% discount.

    I am not going to speculate on the enterprise verison because that is sent out via special licencing.
    JT82
    • I thought we were talking about OEM pricing (nt)

      .
      Michael Kelly
    • I agree, totally...

      That is the [i]fairest[/i] way to price it. Why should those that didn't
      upgrade get the benefits? This is one thing that i think that most people
      would agree that Microsoft should follow Apple's precedent on.
      SimonUK2
    • Vista "Upgrade" Pricing ...

      ... as the cost invariably translates to $1 = ?1 for some reason with MS's exchange rates, that would mean that I would have to fork out another ?199 wedge of my hard earned cash, on top of the initial ?299 I paid for Vista Ultimate about 18 months ago! So, that would mean I'd have to spend the best part of ?500 just for an operating system that doesn't do too much more than it does at present ... that's NOT going to happen any time soon, believe me!

      I'll just stick with Vista Ultimate until either it, or my machine, falls over, then I'll look and see what my options are at that point in time ... maybe MS will have gone bust by then due to everyone boycotting them for their show of pure unadulterated avarice in the midst of a global recession, who knows! The MS management group are now about as popular with the general public as the bankers are ... and for the same reason ... bleeding the public purse until it squeeks!
      Johnny Brandie
      • I'm with you

        Although I don't have Vista Ultimate I believe you are correct with sticking with what you have until the hardware needs to be replaced.
        I have Home Premium and not having any problems with the system, except for long boot times since installing IE-8. I had the same problem with IE-7 until I turned off one of its features. I only wish I could remember what I did so I could do it to IE-8.
        However, I don't plan to upgrade the OS just becaust it is there.
        mietz
      • If you are running Vista now, there is no ...

        ... compelling reason for you to pay good money to go out and buy Windows 7. Wait until you buy new hardware.

        If you are running XP now and you own ample hardware made since 2005, go out and buy the edition of Windows 7 which comes closest to the edition of XP you are running.

        If your hardware is old (before 2005) lame (less than 2GHz single-core processor, less than 1GB RAM, less than 80GB HDD, or XDDM-only graphics only), wait for Windows 7 to ship and then go visit your favorite OEM and buy a new machine.
        M Wagner
        • VISTA sucks

          If a person has VISTA there is every reason to upgrade as windows vista sucks surprisingly windows 7 is almost as good as xp better in some ways
          ozzy_66_62000@...
          • Well, sure, there is that reason.....(NT)

            (NT)
            WiredGuy