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April 21, 2006

Looking for the money in Vista

Posted by David Hunter at 11:14 AM ET.

This week has provided several reminders of one of my favorite questions – how much incremental revenue can Microsoft expect from Vista? This is separate from technical arguments about the Vista feature set and whether it is “novel,” “original,” “sucks,” or something similar as just came up again in Paul Thurrott’s wrap-up to his latest Vista beta review:

Promises were made. Excitement was generated. None of it, as it turns out, was worth a damn. From a technical standpoint, the version of Windows Vista we will receive is a sad shell of its former self, a shadow. One might still call it a major Windows release. I will, for various reasons. The kernel was rewritten. The graphics subsystem is substantially improved, if a little obviously modeled after that in Mac OS X. Heck, half of the features of Windows Vista seem to have been lifted from Apple’s marketing materials.

Shame on you, Microsoft. Shame on you, but not just for not doing better. We expect you to copy Apple, just as Apple (and Linux) in its turn copies you. But we do not and should not expect to be promised the world, only to be given a warmed over copy of Mac OS X Tiger in return. Windows Vista is a disappointment. There is no way to sugarcoat that very real truth.

While that certainly gets the juices flowing, my question is much simpler.

The basic underlying fact is that a Microsoft operating system will be installed on well over 90 percent of all new PCs that are shipped and that this is the vastly predominant way in which Microsoft sells Windows client licenses. Vista doesn’t seem to be so compelling that significant numbers of users will demand operating system upgrades on their existing hardware and Vista doesn’t seem so defective that users will turn away to a non-Microsoft operating system. While there may be temporary blips in anticipation of and then in reaction to Vista’s release, the Windows cash machine will just keep on dispensing at the usual rate tied to new PC sales unless Vista can help Microsoft can increase their revenue per new PC sold and the only way to do that is to reduce piracy and/or charge more per PC.

The piracy reduction effort is a long hard slog, but Microsoft keeps working at it and in the difficult area of relationships with developing countries made progress in just the last few weeks with China ([1], [2], [3]). Specific to Vista, Ina Fried reported at CNET that without authentication of a genuine license, Vista won’t display the fancy new Aero Glass graphical user experience, arguably the biggest new feature. So there’s hope there and perhaps a gain of a few percent in Windows revenues from all of the anti-piracy efforts including Vista features.

More interesting is the Microsoft effort to upsell customers to premium versions of Vista and thereby increase the revenue per PC. I’ve mentioned this before (e.g. [4]) and Mary Jo Foley provided a comprehensive discussion this week including a reference to a new analysis by Rick Sherlund of Goldman Sachs & Co.:

Goldman Sachs estimates that Microsoft is charging PC makers roughly $45 per copy of Windows XP Home and $85 per copy of Windows XP Pro. While the Vista SKUs do not line up, feature-by-feature, with their XP predecessors, Goldman is estimating that Microsoft might charge PC makers $45 per copy of Vista Home, but about $65 per copy for Vista Home Premium, which includes Media Center, Tablet and other functionality built into a single SKU. (It is up to PC makers to determine how much, if any, of a Microsoft Windows price increase they will pass on to customers when selling new systems preloaded with Vista.)

“We think most of the Home market would elect the Premium version since this has the Aero/Glass interface and ability to burn DVDs and related multimedia,” said Sherlund. “We have been more focused on the incremental upgrade revenues from Vista, but the bigger benefit over time is the mix shift to a higher-priced Windows SKU.”

Goldman is estimating that about 75 percent of the Vista consumer demographic will go for the Home Premium version of Vista, as opposed to Home Basic.

If that $20 extra per copy for the premium home edition calculation holds, Microsoft will earn $1.5 billion a year in additional revenues, just by switching its product mix, Goldman reasoned in its April 3 research note. The change in its Vista revenue forecast led Goldman to revise its Microsoft projections, increasing its Microsoft fiscal 2007 earnings-per-share figure from $1.54 to $1.57, and its 2008 estimate from $1.75 to $1.78.

Hopefully most OEMs will make the customer pay up at time of purchase because relying on the easy instant “Anytime Upgrade” mechanism promises to be a swell way to make consumer PC buyers grumpy as they unwrap their shiny new PCs and find out they have to get out their credit cards to get the spiffy new user interface they have heard so much about. Wouldn’t you consider a consumer “Vista PC” that can’t run Aero Glass or burn DVDs as broken? I would.

Hit the article for the considerations for purchasers of the business versions of Vista which are similar, but somewhat complicated by the availability of some versions only to members of Microsoft’s volume purchase programs which leaves out individual users and small businesses:

One enterprise user, who asked to remain anonymous, said his company recently decided to bite the bullet and sign a Software Assurance license to get these features. He called Microsoft’s premium upgrade tactics “extortion.”

Looks like a lot of unhappy campers ahead, but per the article, Microsoft says PC purchasers are relatively price insensitive on operating systems. All the better reason to hit them with it up front rather than nickle and diming them later.

Putting aside the proper method of sugar coating the pill, the net is simply that Microsoft is raising the price per machine for Vista or as Microsoft Vista marketing VP Michael Sievert says:

Rather than upping Windows Vista’s price, “our focus is more on getting people to buy in at a higher price point,” Sievert explained.

Humor aside, how much more will Microsoft get? It’s hard to say without all the pricing information but, since they are the only client operating system in town, the real answer is based on how much Microsoft thinks they can raise the price without incurring the wrath of customers or pesky regulatory busybodies who might get upset about “outrageous profits.” Sherlund’s 2007 estimate is $1.5B on what is now an approximately $14B client OS business, but you can mark it up for audacity or down for caution as you like.



Filed under Aero, Financial, General Business, Governmental Relations, Legal, Licensing, Marketing, Microsoft, OS - Client, Privacy, Public Relations, Technologies, Windows Vista

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6 Responses to “Looking for the money in Vista”

  1. Microsoft 3Q earnings angst on Wall Street -- Microsoft News Tracker Says:

    [...] Finally, since the demand for cash is high, I expect there will be renewed interest in milking more cash out of the Office (aka Information Worker) and Client segments. I discussed last week how there appears to be a concerted effort to expand income from Vista by reducing piracy and raising the price per PC sold, and we just saw a new piracy reduction initiative for Office. Perhaps there will be a concerted effort to upsell Office 2007 too. [...]

  2. Gartner doubts Office 2007 upgrades -- Microsoft News Tracker Says:

    [...] Speaking at the Midsize Enterprise Summit in Paris on Wednesday, Gartner analyst Annette Jump said research done by the group showed that only about 2 percent of companies that weren’t signed up for Microsoft’s Software Assurance plan had adopted for the previous version of the productivity suite–Office 2003. Yikes, it’s in the noise level. The software assurance plan ties companies into automatic upgrades of new Microsoft software at a discounted rate. The plan was updated late last year after coming under fire for allegedly locking users into buying unnecessary Windows upgrades. And software assurance will in future provide exclusive, specialized operating system versions for businesses ([1], [2]). Jump added that few companies will be in a rush to deploy Office 2007 immediately, as many have only recently installed Office 2003. Although Office 2007 will run on Windows XP, most companies will probably look to have Vista installed before migrating to it. [...]

  3. Microsoft’s antipiracy woes continue -- Microsoft News Tracker Says:

    [...] Microsoft’s effort to wring more money from its Office and Windows cash cows had heretofore handled the antipiracy aspect with rather a deft touch, but Microsoft has dug itself into a hole with the Windows Genuine Advantage (WGA) campaign and keeps on digging. Ed Bott: Microsoft’s PR agency apparently e-mailed other tech reporters to try to spike the WGA “kill switch” story I reported on last week. Eric Lai of ComputerWorld got the memo and basically reprinted it with no analysis (”Microsoft denies WGA kill switch in Windows XP”). But Lai’s story does include one interesting new detail, a statistic that Microsoft confirmed in a follow-up e-mail to me: [...]

  4. Major PC vendors announce their Vista holiday coupon plans -- Microsoft News Tracker Says:

    [...] Despite Wong’s protestations, I consider the chances as slim or none that anyone but the consumer is going to be paying the extra for Home Premium. I guess this is part of the vaunted Vista upsell we had heard so much about and that the real answer to the question of why Microsoft bothered offering feeble Vista Basic is that it provides cover in case any regulators get querulous about a monopoly extracting arbitrary price increases. It’ll be interesting to see if how many copies of Vista Basic actually find buyers. Filed under OS – Client, Windows Vista, General Business, Financial, Public Relations, Marketing, Microsoft [...]

  5. Microsoft to expand reach of Windows Genuine Advantage? -- Microsoft News Tracker Says:

    [...] As far as Windows Vista goes, the details aren’t clear but the article speculates that certain premium Vista features will only be available to users who pass the WGA test. In April there had been reports that Vista’s fancy new Aero Class Vista GUI would not be available unless a user passed a genuine licence check. [...]

  6. Vista, Office launch reaction roundup -- Microsoft News Tracker Says:

    [...] As for the return per unit sold to lawful users, Microsoft has laid the ground work for upselling enhanced versions of Vista, but it’s similarly unclear how successful and lucrative that will be. Mary Jo Foley elaborates in Will Vista prices be on a par with XP’s everywhere? Even though the Windows Vista versions don’t match up exactly, feature for feature, with the comparable XP ones, Microsoft has held retail pricing fairly constant, officials have said. (And ditto for volume-license pricing, according to the Softies.) [...]

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