Is Windows getting more expensive?

Microsoft has introduced pricier higher-end versions, as other PC components have fallen in price. So how does it all add up?
Written by Ina Fried, Contributor
Is Windows getting cheaper or more expensive?

The short answer is easy: neither. Roughly speaking, the Microsoft product sells for the same price it has had for years.

The full answer is more complicated. There are all sorts of factors that go into one's sense of whether the leading operating system "feels" more pricey or less expensive--the cost of other PC components and what gets bundled into the operating system are just a couple of them.

Microsoft General Manger Brad Brooks argues that Windows is a bargain, noting that it keeps getting more features for the same price.

VERSION Full packaged product Upgrade version
Windows 98 $209 $109
Windows ME $209 $109
Windows XP Home $199 $99
Vista Home Basic $199 $99
Vista Home Premium $239 $159

Source: Microsoft

"If you break down the cost of the software over the life of the PC, it works out to be less than how much you'd spend on milk for your family over that same period of time," Brooks said.

Now that Windows Vista has been on store shelves for about a month, it makes sense to take stock of how it stacks up from a value perspective.

On the side that makes it feel cheaper, there is more in Windows than ever. Built into Vista are several types of programs that have, until now, cost extra. It has antispyware, voice recognition software included in the box, and other programs, such as Virtual PC, are available as free downloads.

And, while Microsoft has kept prices roughly flat, inflation means that in absolute dollars, the price of Windows has declined somewhat. An upgrade to Windows 98, for example, cost $109 in 1998. But in 2007 dollars, that's $137, according to a Federal Reserve Web site. Today, a copy of Vista Home Basic upgrade costs $99.

On the other hand, because the prices of other computer parts have dropped substantially over time, Windows has become a relatively more expensive part of the average PC. In 1998, for example, the typical desktop cost around $1,100, compared with $650 today, according to figures from NPD Group.

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Relative value
The fact that other PC component prices have dropped more than Windows doesn't necessarily mean the operating system is a bad deal, NPD analyst Stephen Baker said.

"While it does appear that the absolute cost of Windows has gone up over time, especially in contrast to the overall price of the PC and the other components, that rise certainly appears higher than it really is," Baker said. "Just like in hardware, we have to account for the increased value that the upgrades to the OS provide."

Over the past decade, Windows has integrated the ability to burn music CDs, make movies, record TV shows and edit photos. Also, those abilities haven't come steadily over time, but rather arrived in a bunch with each new Windows release.

"This is much harder than calculating the value of hardware, but I think there clearly has been increased value from the OS," Baker said.

But not all of that value has been just given away by Microsoft. The software maker has introduced pricier editions of the consumer operating system, such as Windows XP Media Center Edition, Windows Vista Home Premium and Windows Vista Ultimate edition. So, while the price of the entry-level operating system has stayed the same, it costs more to get all of the bells and whistles.

Michael Cherry, an analyst with Directions on Microsoft, pointed out that many people won't really get a sense of what they are paying for Vista, because it will come already installed when they buy their next PC. "It's really unknown what they pay for Vista," Cherry said.

He noted that on build-to-order computer sites like Dell's, you can uncheck most components of a PC and see how much they add to the bill--but not always. "You can't just uncheck the operating system," Cherry said. (Dell does sell three machines without an operating system as part of its n-series, but adding Windows is not an option.)

Hidden cost
That means that, in large part, consumers' sense of Windows prices will be guided by the overall price of their computer. As long as that continues to drop, consumers are likely to be oblivious to which actual components inside the PC are coming down in cost.

Also worth noting is the fact that computer makers pay significantly less for the copy of Windows that goes on a new PC than do consumers buying a boxed copy of the operating system.

"From the consumers' perspective, they are getting a lot more bang for the buck then they did two years ago," said Samir Bhavnani, research director at Current Analysis.

However, one wrinkle in this trend is that Vista tends to work best on a more capable machine. Although it is too early to tell, there are some indications that Vista will push up average PC prices, or at least slow the price decline, Bhavnani said. He noted that in February 2006, the percentage of sub-$500 desktops and notebooks sold grew, compared with the prior holiday shopping season. But this past February, as Vista hit the market, the market share of sub-$500 PCs dropped significantly from the prior holiday season.

Even still, Bhavnani doesn't think too many consumers are viewing Windows as pricey. He noted how new cars would seem inexpensive if year after year they stayed the same price and offered more horsepower.

NPD analyst Chris Swenson said more people may start to notice Windows pricing given all of the upgrade and antipiracy measures in Vista. The new options mean that those with non-genuine copies are prompted to pay for their version, while those who want to move to a more full-featured edition can also do so--for a fee.

But most of the people who think about the price of Windows are those who actually go to a retail store and buy an upgrade copy, Cherry said. So far, sales of boxed copies of Vista have trailed initial sales of Windows XP, according to NPD data.

Cherry anticipates that most people will buy a flavor of Vista that corresponds to the version they have of XP. But some will want to move up to a heftier-featured edition, and that will add further to the perceived cost. That's particularly true if a consumer opts for Vista Ultimate, which sells for $259 as an upgrade and $399 for the full product.

"It is a lot more expensive," Cherry said.

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