Microsoft will struggle to convince netbook users running Windows 7 Starter to upgrade latre to a more expensive edition, according to retail market analyst.
Previously, analysts have speculated that Microsoft will try to move users of Windows 7-powered netbooks to a more expensive version as a way to squeeze revenue out of its next operating system. One route: the built-in Anytime Upgrade, a feature that lets users move up to a more feature-filled edition by plunking down cash for an unlocking code.
But Anytime Upgrade prices may be anything but cheap. Several online resellers in the US recently leaked prices of Windows 7's Anytime Upgrade from Starter, the version designed for netbooks, to Home Premium, the edition destined for most consumer desktops and laptops.
Anytime Upgrade prices as leaked by four resellers - eCost, Fadfusion, PC Nation and PC Mall - ranged from $89.98 to $80.99. The average of $85.42 represented 71% of the US retail price of Windows 7 Home Premium Upgrade, a licence for upgrading Windows XP or Vista to the new OS.
"Microsoft needs to be more aggressive," said Stephen Baker, an analyst with the NPD Group. "At those prices, there won't be many opportunities to [convince users to] trade up. If people are buying cheap [PCs] they're buying cheap for a reason."
Netbooks sell for between $200 and $500, making the $85 upgrade an extra expense of between 16% and 40% of the original purchase price of the PC.
Another factor adding to upgrade reluctance, said Baker, is Microsoft's decision to drop the three-application limit it once baked into Windows 7 Starter. In late May, Microsoft backed away from the limitation, which would have blocked users from running more than three applications simultaneously. Before it changed its mind on the Starter restriction, Microsoft had been broadly blasted by users and bloggers. The lifting of the three-application limit means fewer Windows 7 Starter users will be motivated to upgrade to Home Premium, Baker said. "Microsoft has said that Windows 7 runs pretty well on netbooks," he said, and if users take the company at its word, they may not feel the need to upgrade from Starter.
If the leaked prices are accurate and Baker is right about the three-app limit, Windows revenues may slip again. Revenues were down 16% in the first calendar quarter of 2009, and off 8% year-to-year for the last three months of 2008. Microsoft blamed the struggling PC market and the rise of netbooks for soft sales.
Netbook sales have hurt Microsoft because they're currently equipped with Windows XP Home, a much less expensive OS than, say, Vista Home Premium. That's driven down Microsoft's 'premium mix', the proportion of Windows sales generated by higher-priced editions. Last quarter, for example, the premium mix fell 11 percentage points compared to the year before, from 75% to 64%. During 2008's fourth quarter, the premium mix was down 16 points year-to-year.
Wall Street analysts have hoped that Microsoft would be able to boost the premium mix rate and help return the Windows group to profitability with Windows 7, perhaps on the back of affordable Anytime Upgrades.
Some technology analysts, however, think Microsoft will have to live with a lower premium mix rate. "The preference for lower-priced PCs [involves] fundamental shifts in the marketplace that will not dissipate once the economy improves," Allan Krans, an analyst with Technology Business Research, said in a note to clients earlier this year. "Windows 7 ... [delivers] a more stable, lightweight and intuitive interface, rather than continuing with the direction of Vista. The end result may be that Microsoft sells more versions of Windows 7 at lower price points."
While NPD's Baker thought it unlikely that Microsoft could persuade many Starter users to upgrade, he wondered if that would be necessary, at least in mature markets like the US. "From what I'm hearing now, my best guess is that most netbooks will end up with [Windows 7] Home Premium," he said. "In developed countries, netbooks are moving toward being more robust, not less."
Even if that happens, however, Baker thought Microsoft would find it difficult to charge OEMs for Windows 7 at the prices earlier versions commanded. "Microsoft will have to live with lower prices because the PC price envelope is so much lower now than it was two-and-a-half years ago. The old prices just aren't sustainable."