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Vista: Expect a Premium Push (With Premium Prices)

Posted by iMark - 2006-04-20

Microsoft is still holding many specifics about Windows Vista — pricing among them — close to the vest. But Redmond's reticence to talk isn't stopping company watchers from speculating.
Goldman Sachs & Co. analyst Rick Sherlund issued a research note earlier this month, noting that Goldman is now figuring Microsoft could garner an extra $1.5 billion per year in revenues simply by persuading users to buy the premium Vista versions.

Microsoft announced earlier this year that it is readying six core Vista packages, or SKUs: Windows Starter 2007; Windows Vista Enterprise; Windows Vista Home Basic, Windows Vista Home Premium, Windows Vista Ultimate, and Windows Vista Business.

In February, company officials reiterated Microsoft's goal to convince more customers to opt for Vista's premium SKUs — specifically, Vista Enterprise, Vista Home Premium and Vista Ultimate — when selecting their next-gen Windows operating system. Rather than upping Windows Vista's price, Microsoft will be able to maintain and grow its Windows revenues by getting people to buy in at a higher price point, company officials have decided.

Currently, the estimated retail price of Windows XP Home is $99 per copy for an upgrade, and $199 for a full version. For XP Professional, those prices are $199 and $299, respectively. But Windows XP Media Center Edition, which is an example of a current-day "premium" version of XP, sells for $320-plus per copy.

Retail sales comprise a relatively small part of Microsoft's Windows business, however. Microsoft obtains more significant shares of its Windows revenues from PC makers on the consumer side, and volume licensees on the business side.

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.

On the enterprise side, the calculation is not quite as clear-cut, but the logic still holds. If Microsoft can convince business users to flock to the Enterprise rather than the less-feature-rich Business variant of Vista, Microsoft will be able to reap significant revenue returns, even if the actual price per copy increases little or none.

Stick, Meet Carrot

Microsoft is using more of a stick than a carrot on the business side to convince customers to go with the premium Enterprise SKU. Microsoft has decided to make a number of the Vista features that it has honed for enterprise users -- specifically, the BitLocker drive encryption; Virtual PC Express virtual-machine support; the Subsystem for Unix-based Applications (SUA), which is designed to allow Unix applications to run on Vista machines; and access to all worldwide languages supported by Vista via a single deployment image – only available to users who agree to sign up for Microsoft volume-licensing agreements, such as Enterprise Agreements and Software Assurance.

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."

In addition to overcoming these kinds of negative perceptions, Microsoft has some other issues with which to contend before its premium push will work, company watchers said.

"It would appear that (Microsoft's) goal is get people onto Vista and as they use it, get them to pay to move to the next edition," through programs such as Windows Anytime Upgrade, said Michael Cherry, an analyst with Directions on Microsoft. "But the problem here appears to be the unknown hardware requirements. Consider the case where a customer has one of the lower editions, say Home Basic. Conceptually it is possible to upgrade to Ultimate, but what will the experience really be like? Will the computer they have with Basic really run Ultimate? What will it be like without a high-end graphics card or TPM (Trusted Platform Module)? So in the end, the customer may end up disappointed."

Cherry added that the customer set for which the effects of Microsoft's planned premium strategy is most murky is small and mid-size businesses.

"What is really unclear here is how this will play out for the small to medium sized business, who are not likely to have (volume-license) agreements, but rather buy from OEMs. Will they be forced to buy (Vista) Ultimate (edition)?"

It's also still uncertain the extent to which Microsoft will up Vista's street and OEM/PC maker prices by the time it launches the product in January 2007. While many industry watchers are not expecting Microsoft to jack-up wildly Windows' prices, there is some wiggle room.

According to Microsoft's own Windows research, cited by company officials at Microsoft's 2005 Financial Analyst Day meeting, users base their operating-system purchase decisions on first on compatibility, followed by feature set, security and quality, cost, availability and brand preference. In other words, operating-system pricing is only fourth on users' lists, when evaluating new systems.

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