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

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?