What PC makers are paying for Windows 7

Microsoft's pricing plans for Windows 7, which will be available October 22 on both new PCs, has been the source of considerable tension between the PC makers and the software maker, both of which are trying to grapple with both declining demand and falling prices for traditional PCs.

In an interview on Thursday, Senior Vice President Bill Veghte acknowledged that there has been tension between Microsoft and the PC makers over pricing, but said that is always the case when Microsoft readies a new version of its operating system.

"They'd love to have everything at dramatically lower prices," Veghte said, of the computer makers.

On the mainstream consumer side, Microsoft is only offering only one version--Windows 7 Home Premium, whereas with Windows Vista, Microsoft offered both a basic and premium version. Veghte says he understands that, from the PC makers perspective, Microsoft took away an option for low-cost PCs. In part, he said, that's why Microsoft decided to charge a price for Windows 7 Home Premium that was more than Vista Basic, but less than Vista Home Premium.

"We took a blended approach," he said. "It wasn't like I am trying to jack up the prices."

For Windows 7 Professional, as Microsoft did on the retail side, the software maker will charge PC makers essentially the same as it did for Windows Vista Business. However, he said, buyers are getting more with Windows 7 because the professional version also includes the consumer media features, something that wasn't the case with Vista.

PC makers, though, have continued to see both average selling prices and profit margins under continued pressure.

Veghte said Microsoft, too, has seen the amount of money it gets for each copy of Windows drop in recent years.

"Our average selling price has been declining as well," Veghte said. "It's not like we have sat there at the (same) price points the last five years."

For his part, IDC analyst Richard Shim said the fact that PC makers are complaining about price--and not the product itself--is a positive sign for Windows 7.

"If the only thing the market is squabbling about is price, that's a good thing for Microsoft," he said.

One of the biggest changes Microsoft did make in response to PC maker concern, was to lift a restriction on the Windows 7 Starter edition it is selling for use in Netbooks. Initially, Microsoft planned to restrict Starter-based PCs to running no more than three applications at a time.

Microsoft also agreed not to charge PC makers for a program in which, starting tomorrow, buyers of Windows Vista PCs can get an upgrade to Windows 7. That enables PC makers to offer the upgrades for free, or only the cost of shipping, without losing money.

Veghte said lifting the Starter restriction was important to computer makers and consumers and something that Microsoft could live with. The three-application limit began with Windows XP Starter Edition, which was aimed at first-time computer users and sold only on new PCs in emerging markets.

"It clearly was not winning any popularity contests," he said of the limit. "I don't think it fundamentally changes the business approach."

It does, though, pave the way for Windows 7 Starter to become the dominant operating system on Netbooks, Shim said. IDC forecasts that the Netbook market will shift largely from Windows XP to Windows 7 next year, but Shim said that much of that will be the lower-priced Starter Edition.

That means, Microsoft's Windows 7 revenue could be in for a hit if traditional notebook and desktop sales don't pick up. The upside, Shim said, is that Microsoft will benefit when sales do pick up, even if it is next year.

"Even if they only hit a single or double with the launch, they can get some extra bases in the coming years," he said.

This article was originally posted on CNET News.