22 August 2006

Software Distribution: "How much is Windows worth?"

A very interesting article by Ed Bott has appeared on ZDNet entitled "How much is Windows worth?" It starts with the observation:
"Years ago, Microsoft created a multi-tier pricing structure for Windows that emphasized pre-installing its software on new PCs. The result was, by one measure, an outrageous success. ............ Ultimately, Microsoft's confusing business strategy has led to a problem that threatens the success of its next version, Windows Vista. My instinct says consumers can't value an operating system at more than 10% of the value of the physical hardware. Historically, 9 out of 10 copies of Windows are sold preinstalled on new computers. The business model that Microsoft created has been so successful that the average consumer has no idea what Windows is worth. The notion that different purchasing channels have different Windows license restrictions is
completely inscrutable. (How many questions can you get right in
this quiz?) In fact, based on prevailing PC prices in the retail channel, I wouldn't be surprised if most consumers think Windows is essentially free. "
This is equally true here. On the PC World websites Packard Bell Pentiums with 15" TFT monitors are offered for sale at £329.99 including VAT and Windows XP at £244.97 (£259.99 in the shop) including VAT.

Ed sees 3 fundamental implications for this disconnect between what people think Windows is worth and the much higher price tags Microsoft puts on the retail product:

  • Artificially high retail prices encourage consumers to unwittingly buy counterfeit software.
  • High retail prices discourage upgrades.
  • There's no family value. Apple has an excellent idea, with a fixed $129 upgrade price and $199 family packs that can be used to legally upgrade up to five Macs.

Ed suggests that Microsoft should bone up on elasticity of demand.

3 comments:

tin422 said...

I could not recall of any Microsoft's project that went flap. I mean that company has spent so many years of building its' name and generating profits. They have established well enough that if they venture unto any projects, it will sure be a success.

John Lambert said...

Thanks for taking the trouble to read and comment on this post, tin422.

In general, there is a lot of force in what you say. Commercial success does tend to indicate quality and Microsoft does spend large amounts of money on R&D - at least some of it here in the UK.

However, that is not quite the point of Ed Bott's article or my comment. Ed says that in the USA the cost of a new desktop upon which the operating system is already installed is not much more than the cost of that operating system on its own at a retailers.

Having just received a borchure for a new desktop for under £200 from a major retailer the same appears to be happening here too.

Returning to your general point, the fact that one product sells well does not mean that it is the best. There are lots of factors that govern demand. Also, I can think of at least one or two Microsoft products that did not stay long on the market and did not seem to be particularly useful. That's no slur on Microsoft. Not even a market leader can get everything right.

James said...

One obvious example springs to mind - Microsoft Bob, whose level of success is probably best demonstrated by the fact few if any people have ever actually heard of it, let alone bought or used a copy...

WebTV? Well, that one didn't quite go to plan either. Their AOL-killer ISP is a very long way behind AOL - and one part of that strategy involved buying a chunk of Telewest for $2.6 billion; the fact they sold that same stake three years later for $5m probably suggests it wasn't a huge success either.

Then there's their search engine, which quickly defeated Google... or not.