Windows Vista Price Cuts Are Historic, But Not SignificantWindows Vista Price Cuts Are Historic, But Not Significant

Last week, Microsoft announced that it was cutting retail prices for Vista. In one way, this is pretty historic. I've been watching Microsoft for two decades, and I can't remember a time when it's actually cut the price of Windows. It doesn't say much for the retail demand that should be fueled by upgraders, but that's to be expected given Vista's high hardware demands. In the end, though, you can't read much about Vista's ultimate success or failure from this move.Brad Brooks, a corporate VP for Windows marketing at Microsoft, said, "[W]e conducted promotions in several different markets combining various marketing tactics with lower price points on different standalone versions of Windows Vista. While the promotions varied region to region, one constant emerged -- an increase in demand among consumers that went beyond tech enthusiasts and build-it-yourself types." In other words, the lower price was offset by higher unit sales, resulting in higher total revenue for Microsoft.

I am surprised that there is any elasticity in the retail market. Most users never buy a copy of Windows at all; they buy a PC that already has Windows installed. Microsoft's main Windows customers are system makers, not users. There's no indication that Microsoft is cutting prices to those guys. Why cut prices when hardware makers have few other choices? You won't see OEMs getting a price break until they can parry Microsoft with realistic competition, such as desktop Linux.

The retail Windows market only accounts for about 10% of all the licenses that Microsoft sells, although it's a larger share of the revenue since users don't get quite a good a deal as OEMs. Most of those licenses are sold to upgrade old systems, replace lost OEM licenses, and install on home-built PCs. (Users building their own PC can purchase a "system builder" license from sites like NewEgg.com, but many don't realize that and buy higher-priced retail licenses.)

Vista retail demand may be somewhat sensitive to price, but I would think pragmatic issues would factor even more heavily. Normal users tend to stay with whatever version of Windows came on the computer, Vista hasn't had the best reviews, and Vista's hardware requirements (combined with driver issues) preclude upgrades for many existing XP users anyway. So, are there a lot of users who want to upgrade to Vista but were held back by price? Microsoft says yes; in any case, a price cut isn't a bad outcome, no matter what the reason.