In what may be an unprecedented decision, Microsoft said Thursday that it plans to lower the retail prices for several flavors of Windows Vista.
For those in the U.S., Microsoft is cutting prices only on the higher-end versions of Vista, and only for the upgrade version used to move from XP or another copy of Vista. The suggested price for Vista Ultimate drops to $219 from $299, while Home Premium falls to $129, from $159.
Other developed markets will also see price cuts, while in emerging markets, Microsoft is eliminating the distinction between full and upgrade versions of Home Basic and Home Premium as it attempts to convince more users there to use genuine software.
Analysts were surprised by Microsoft's move.
"I can't remember a big price cut like this," said analyst Chris Swenson, who tracks retail software sales for NPD Group. "It's very unheard of."
Microsoft finalized Windows Vista in late 2006, but held back its retail launch of the product until January 2007. It has sold more than 100 million copies, largely on the back of a strong overall PC market, but retail sales have significantly trailed those of XP in its early days and Vista has received a number of critical reviews.
In an interview, newly minted Windows consumer marketing vice president Brad Brooks said that Microsoft had been testing lower prices over the past few months and was surprised to find that the amount of revenue lost was more than made up for by an increase in the number of PC buyers willing to shell out for an upgrade.
Brooks said that Microsoft had done a lot of research prior to Vista's launch, but noted that both Home Premium and Ultimate were new products for the company. "We probably got the pricing mix wrong," he said. "You don't always get it right, but you make the adjustment."
Gartner analyst Michael Silver said the move--which applies only to standalone versions sold at retail stores--is puzzling. "It's sort of an odd move," said Silver, who noted that the market for such upgrades is fairly limited. Those who bought XP in the fourth quarter of 2006 got a coupon for a free Vista upgrade, while most of those who have bought systems since then have gotten Vista. Machines purchased prior to 2006 probably aren't all that attractive as candidates for a Vista upgrade.
"I guess at the end of the day anything that makes Vista a little bit more accessible is probably a good thing," he said, but added that a cut in the price computer makers pay would have a far bigger impact, given new PC licenses account for 80 percent of Vista sales. "The whole notion of upgrading PCs has sort of fallen by the wayside."
And, a retail price cut could actually hurt Microsoft when it comes to the market for new PCs and among businesses trying to decide when, or whether, to move to Vista.
"To the extent this ends up damaging Vista's reputation instead of broadening its appeal, I think that's a danger," he said.
Brooks discounted that, saying that if that were the case, Microsoft would have seen sales drop rather than rise when it tested the lower price promotions in France and the United Kingdom in December and January. As for the limited market for upgraders, Brooks said the new pricing should also make it more attractive for existing Vista PC owners that want to move to a higher-end version.
Swenson noted that while a Windows retail price cut may be unprecedented, Microsoft has seen some gains by cutting the price of other products, most notably when it added the Student and Teacher version of Office. Not only did unit sales go up, he said, but total revenue increased as well as Microsoft was able to tap a new wave of demand.
"Even though they have this huge market share they still have to price their products to move," Swenson said. Swenson had called for such a Vista price cut last year, with standalone Vista sales badly trailing those seen for XP in its first six months.
"While the main culprit behind the poor performance of the 'shrinkwrapped box' Vista (sales) is most likely the more stringent hardware requirements of the new version of the operating system, the lower sales volumes could also be a signal that Microsoft is not pricing its product appropriately," Swenson wrote in a report looking at Vista's first six months on the market. "If PC prices have plummeted almost 25 percent since the launch of Windows XP, then it makes sense that Microsoft would take such price drops into consideration when pricing (boxed copies of Vista). Thus, Microsoft should strongly consider instituting an across the board price cut for all editions of the operating system, the low-end editions in particular."
Brooks also pointed to the increase in sales Microsoft saw when it cut the price to computer makers for Windows XP Media Center Edition. Initially pitched as a high-end version above Windows XP Pro, Microsoft eventually lowered the price to not much higher than Windows XP Home and saw it become the dominant consumer version.
"It went from a run rate of about 1 million (copies) a year to a run rate of several tens of millions a year," Brooks said. "So yeah, we got it right."