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No price cuts for Windows 8 upgrades, says analyst

Microsoft has no compelling reason for 'cheap pricing trick' this time around

Microsoft will not reduce the price of Windows 8 upgrades, as it did three years ago before the roll-out of Windows 7, a retail sales analyst said today.

"I would expect upgrade pricing to consumers to be on par with Windows 7," said Stephen Baker of the NPD Group. "They had a compelling reason to get consumers off of Vista and priced [it] to make that happen [in 2009]. But the reason to get consumers onto a more modern platform with a software upgrade is a lot less now than in 2009."

Three years ago, Microsoft dropped the price of the primary Windows 7 upgrade edition -- Home Premium -- by $10, or about 8%, from what it had charged customers for the comparable upgrade to Vista two years earlier. It also cut the price of the full version of Windows 7 Home Premium by $30, or 17%.

Other editions, however, including the business-oriented Windows 7 Professional, were priced the same as their Vista ancestors.

At the time, Microsoft did not openly tout the Windows 7 price cuts as a way to move people off Vista, but the newer OS has put Vista in the rear-view mirror: The latest statistics from Web metrics company Net Applications showed Vista with a 7% share of all operating systems, down from its peak of 19% in October 2009, the month Windows 7 launched.

Three yeas after its launch, Windows 7 holds a 39% global share, second only to the nearly-11-year-old Windows XP.

Although Microsoft is probably weeks away from announcing Windows 8 pricing -- in 2009 it waited until late June to reveal Windows 7's -- Baker made a case for why the company will keep to its current chart.

"They believe in the value of Windows and they will want to charge against that value," said Baker. "I think they see a world where the consumers' trust in Windows will be rewarded and they can derive revenue from that."

Under that theory, Microsoft would be hesitant to cut prices, believing that doing so would cheapen the value of the new OS in the eyes of customers. And Microsoft has been adamant about Windows 8's value, casting the new OS as a revolutionary departure that justifies the repeated use of the tag phrase "Windows 8 reimagines Windows."

That's why Baker saw price cuts as sending the wrong message.

"I think Microsoft will be, and correctly in my view, very wary about devaluing Windows in the customer's eye by some sort of cheap pricing trick," he said. "They believe the product has value and will grow rapidly regardless of the price of the upgrade and that is incentive enough, in my mind, to not reduce the price."

Some, however, have speculated that Microsoft will drop the price of Windows 8 to encourage users to adopt the new OS. The reason: The more people running Windows 8, the more revenue Microsoft can earn from the new Windows Store.

Windows Store is Microsoft's app market for Metro-style software, and will be accessible only to Windows 8 and Windows RT users. Microsoft will take a 30% cut of the first $25,000 each app earns, then 20% of all additional revenue.

Baker dismissed that idea as well.

"I am sure they would look at the value of Windows 8 on its own, not subsidized by something else," Baker argued. "It would not be in their best interest to use those [Windows Store] revenues to subsidize Windows 8 pricing."

While Baker believes that Microsoft will hope for a quick adoption of Windows 8, he doesn't think the company needs to reduce the price of upgrades to accomplish that.

If Microsoft did cut Windows 8 prices, here are some possible outcomes based on 5% and 10% cuts from current Windows 7 list prices.

"Unless PC sales fall off a cliff, the [Windows Store] is going to have a pretty large base to sell into very quickly," he said, talking about the fact that once Windows 8 launches most new PCs will come with that edition pre-installed.

Microsoft makes most of its Windows revenue from licenses sold to OEMs -- the original equipment manufacturers, or computer makers -- rather than from individual copies of its OS. While Windows 7 will be sold at retail for a year after the launch of Windows 8, and OEMs can sell PCs with the older operating system pre-installed for up to two years, most new PCs will be packaged with Windows 8 soon after its debut this fall.

Microsoft plans to widely ship only two retail editions -- Windows 8 and Windows 8 Pro -- that will be roughly analogous to Windows 7 Home Premium and Windows 7 Professional. The company has ditched Ultimate, the top-end retail version that never caught on.

And unless Microsoft makes a major change in how it structures its retail line, it will sell both "upgrade" and "full versions" of the two Windows 8 editions, for a total of four SKUs, or "stock keeping units."

With Windows, an "upgrade" edition can be installed only on a PC that already runs an older flavor of the OS -- Microsoft typically limits the eligible versions to the two prior to a new release -- while a the pricier "full version" must be used to install on a new machine, one running a non-Microsoft OS, or one running an even-older copy of Windows.

But even if Microsoft keeps Windows 8 pricing at Windows 7 levels, customers may be able to buy Windows 8 upgrades for less than list, if only for brief periods.

Three years ago, Microsoft slashed the price of the Windows 7 Home Premium upgrade by 58% to $50 during a two-week pre-launch promotion. At the same time, it also dropped the Windows 7 Professional upgrade price by 50%, to $100.

The company has not announced a similar deal for Windows 8, but has hinted that it will run specials this time around, too.

Also likely on the horizon is a Windows 8 bundle that would match the $150 price for Windows 7 Family Pack, a three-license upgrade that Microsoft first sold in 2009 and has offered on-and-off since then.

For Baker, the Family Pack is the one SKU Microsoft should consider selling at a lower price than the Windows 7 version.

"[Microsoft should be] more aggressive in marketing and selling the multi-pack SKUs, which should be their primary focus," he said.

The NPD Group's data, Baker added, shows that half of all U.S. computing households have at least one Windows 7 PC, and a quarter have at least one running Vista.

"That indicates there is lots of overlap in multi-device households, and Microsoft will want to enable consumers to upgrade all the eligible devices in the house at once," said Baker.

Microsoft will issue the Windows 8 Release Preview -- the final public milestone for the operating system before its launch -- the first week of June, and may reveal some upgrade details and prices then.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is [email protected].

See more by Gregg Keizer on Computerworld.com.

Read more about windows in Computerworld's Windows Topic Center.


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