February 3rd, 2009
Easy Windows 7 upgrades could earn Microsoft billions a year extra
Most analysts who looked at Microsoft’s announcement earlier today of its new lineup of Windows 7 editions have focused on the number of SKUs and are busily debating whether the new selection will make choices more or less confusing for Windows customers. But there’s a more important story buried in the details, one that will only become apparent when Microsoft fills in the rest of the picture by attaching price tags to the members of the Windows 7 family.
Two weeks ago, Microsoft delivered the shocking news that its Windows Client division reported declining revenue on a year-over-year basis, despite selling approximately as many licenses as it did in the previous year. It’s easy to blame the shortfall primarily on netbooks, as Microsoft did. Indeed, those small, cheap PCs are part of the problem. The market figured out that the least expensive Home edition of Windows (XP or Vista) is an ideal choice for netbooks and in fact is perfectly adequate for many tasks on mainstream PCs. That’s why Vista Home Basic is so popular on entry-level business PCs.
The big challenge for Microsoft in the Vista-to-7 transition is how to increase the average price of a Windows license without making users scream or quit in protest. By changing the upgrade game in Windows 7, they’ve created the conditions for a whole new revenue stream - and, paradoxically, have the chance to offer Windows customers an upgrade deal they’ll actually want.
I’ve crunched the numbers, and my rough calculations suggest that this realignment could be worth hundreds of millions, and perhaps billions of dollars in new revenue for Microsoft, even if PC sales remain flat. Here’s how I came to that conclusion.
On new PCs, which make up the overwhelming majority of the PC market, Microsoft’s partners choose which Windows editions will be installed on a given PC at the time of purchase. Their goal is to keep costs as low as possible, which is terrible news for Microsoft’s bottom line. In essence, OEMs make their OS choice based on the total price they want to sell a system for. If you buy a system sold at a retail outlet like Best Buy, customization is impossible: You get what’s preinstalled. Companies that offer build-to-order PCs sometimes give the buyer a choice, but most customers accept the default configuration, which usually includes Vista Home Premium for a consumer PC, Vista Business for models designed for the corporate market, and Home Basic for entry-level systems for home and small business buyers.
OK, so you buy a new PC with Vista Home Premium and take it home, and then you discover that you can’t use Remote Desktop to manage that system remotely, and it doesn’t allow you to recover files saved by the Previous Versions feature, and you can’t do image backups. If you want those features, you have to buy an upgrade copy of Ultimate edition at a typical cost of $150 or more. And if you decide to upgrade after the fact, you not only pay through the nose, you also sign up for several hours of downtime as the upgrade completely replaces your existing installation and then migrates your programs and data files.
Long story short, the current Windows upgrade model is completely irrational. As a result, almost nobody upgrades their copy of Windows Vista. You use what came with your PC and Microsoft sees almost nothing in upgrade dollars.
That means, in practical terms, that Microsoft’s revenue from Windows client licenses is set by the mix of PCs in the marketplace and effectively determined by OEMs. To get a handle on how the mix works, I did some very rough back-of-the-envelope calculations. The following table assumes that Microsoft sells 200 million Windows licenses per year. I consulted with a few industry analysts to guess at approximate market shares and OEM costs for those licenses, and came up with the following total.
| Vista SKU | Share* | OEM cost* | Total** |
| Home Basic | 12% | $30 | 720 |
| Home Premium | 65% | $60 | 7,800 |
| Business | 20% | $90 | 3,600 |
| Ultimate | 3% | $120 | 720 |
| - Total - | Avg: $64.20 | $12.84B |
* Estimate, for illustrative purposes only
** Based on 200 million licenses sold
The only way for Microsoft to adjust that number is to convince OEMS to build new PCs with higher-priced editions (and thus higher price tags) than they previously used. Good luck with that strategy.
So what’s Plan B?
Crunching the Windows 7 numbers –>
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Ed Bott is an award-winning technology writer with more than two decades' experience writing for mainstream media outlets and online publications. See his full profile and disclosure of his industry affiliations.
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| 02/04/09
