Get Ready for a Windows Price Cut

Microsoft (NASDAQ: MSFT  ) Windows 8 and Windows RT aren't doing too hot right now. Consumer reception has been mixed at best, and the software giant has a lot riding on its new operating system platforms. What tricks does Microsoft have up its sleeve to turn the tide?

This can't be good
Asus, the No. 5 PC maker in the world, just conceded that overall "acceptance" of the new platform in the fourth quarter was not good, although the subset of touch-based laptops fared reasonably well. The OEM shipped 3 million tablets during the quarter, but only 5% of these were Windows devices, with the rest running Google (NASDAQ: GOOGL  ) Android. Of course, Asus builds the Nexus 7, which is one of the best Android tablets available right now, so some strength there is to be expected.

Samsung has now also decided to discontinue sales of Windows RT tablets in Germany due to weak sales. Pulling out of one of Europe's biggest and healthiest economies isn't a good sign for Windows RT's prospects across the pond. That comes just months after Samsung specifically said it wouldn't launch its Windows RT tablet in the U.S. because it felt it would need to do most of the "heavy lifting" when it came to consumer education. Even though Windows RT devices are cheaper than full-fledged Windows 8 ones, they also lack numerous features like legacy app support.

Let's make a deal
With Windows 8 and Windows RT struggling, one of the tools in Microsoft's arsenal is the good old price cut. According to The Wall Street Journal, Microsoft has begun offering price breaks to OEMs in order to motivate development. These discounts are specifically geared toward form factors with smaller displays, since those types of devices are expected to carry lower price points than larger PCs.

The hope is that cutting OEM licensing fees will similarly result in lower retail price points for consumers, which may spur adoption of the controversial platform. Microsoft has historically been hesitant to give price breaks to OEMs, but desperate times call for desperate measures. OEMs still account for roughly 20% of its product revenue mix.

Blasphemy!
Microsoft reportedly offered OEMs a bundled deal of Windows 8 and Office for just $30, but only for touchscreen gadgets under 10.8 inches. That's a huge discount compared to the $120 that it normally asks. DIGITIMES separately released a similar report, saying that Microsoft was offering a $20 discount in addition to including Office 2013.

The language isn't exactly clear, since the WSJ says that the licensing fee is $30, whereas DIGITIMES is pegging just the discount at $20. A $20 discount sounds much more reasonable than dropping the overall price by 75%. It feels blasphemous to say, but it would appear that DIGITIMES is more accurate than the WSJ.

Even if it's good, it's bad
The whole situation illustrates the structural challenges that Microsoft faces in the mobile transition, even if it's able to gain traction in market share. The operating system licensing fees that it's built its business on are under pressure in the face of tablet adoption.

Apple's (NASDAQ: AAPL  ) iPad lineup now starts at $329 for the iPad Mini and $499 for the full-sized model, and most tablet rivals have had a hard time making a dent in iPad unit sales. Apple can charge more because it offers a differentiated package of integrated hardware and software. The OEMs that see any modicum of success prefer to use Android, as it's open source, and the royalties they end up paying Microsoft are still less than a Windows license would cost them.

On the low end, Amazon.com and Google have created consumer perception that small tablets of respectable quality should cost no more than $200, leaving little room for other OEMs to pay for Windows and still hope for margins. Even if Microsoft can spur OEM uptake, it's still looking at incremental revenue declines per license relative to what it's used to fetching for PCs.

This next part is going to be hard.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


Read/Post Comments (8) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2013, at 11:12 PM, shirleyjw wrote:

    I have run a small business for 20 years. We have about a dozen computers. I cannot, as a business man or otherwise, understand the logic of Microsoft. If I had a product with which everyone was familiar, I would exploit that familiarity by leveraging off of it with successive versions, exploiting the learning curve. These clowns change everything on the system. Things my employees knew how to do easily now requires hours of fumbling around, which is nothing but a productivity loss. What were they thinking. I have several computers that have xp, and I have paid and will continue to pay to maintain them to avoid updating to this software. I have one WIndows 8 computers, and it is a disaster. Further, I sent a new computer to my 80 year old mother so she could keep in touch with email and use the WEB, and she is even more confused and confounded by it. What were they thinking. I despise their products and long for the day when someone creates a simple operating system that is not constantly arm wrestling with you to control your computer, what you load on it, what search engine you use, what products you buy. Whatever happened to the time that when you bought something, you owned it and it was considered illegal for others, including the manufacturer, to interfere with your use and enjoyment of it. I hope they flop, flop, flop.

  • Report this Comment On March 06, 2013, at 11:18 PM, alboy5 wrote:

    Wow Windows 8 is superb superior to aapl ios.

    Iaapl sauce is way too high. Can't wait for the latest variation of the ipad between 4.5" and 9.9" screen. Then there are the new products the iwatch and the ipencil "new" but retro as those products have been around for centuries.

    If people are turning against great tech like windows8, iaapl's day of reckoning is coming soon.

    Ibye and panic sell aapl.

  • Report this Comment On March 06, 2013, at 11:21 PM, jhf678 wrote:

    @shirleyjw your 80 years old mother better use tbe phone to call you.

  • Report this Comment On March 06, 2013, at 11:26 PM, AsokAsus wrote:

    Yeah, cutting the bundle from $120 to $30 for both W8 AND Office is pretty much giving Office away for free, and this sounds like total desperation to me too. Still, it's not gonna help. Sure, the same hardware vendors who originally slurped up giant gulps of the Windows 8 Kool-Aid (and who are now losing their shirts because of that) will slurp this new batch up also. But consumers have already wised up about Windows 8, and the stupid vendors will lose even MORE of their shirts because Microsoft could offer Windows 8 for free, heck even try to PAY people to use it, and people still won't use it because Metro UI is such a horrible interface.

    Windows 8 is DOA just as predicted by many a year ago, and literally PAYING consumers to use it isn't going to work. By the time this "new class" of tiny-screen Windows 8 thingies comes out this fall, Windows 8 will have such a bad reputation that anything that includes it will be radioactive. Microsoft is beating a dead horse and trying to convince its "partners" to help futilely flog the dead thing back to life too.

  • Report this Comment On March 06, 2013, at 11:59 PM, Solov wrote:

    I laugh at fools that don't mind typing 300 words of hate about system they haven't really used (outside of electronics store or somebody else's computer).

    One would think that nobody holds a gun to their head forcing them to buy Windows if its so bad.

    As for "poor" OEMs, well they were hoping that MS will magically make their *crap!* sell. Guess what, say what you want about AAPL, but they sure made people not what to buy crap (think netbooks, another clever OEM attempt). What I mean by that is that only now there start to appear more or less okay devices that can make full use of Win8. And *that* is not MS fault, heck they even started to make own hardware...

  • Report this Comment On March 07, 2013, at 12:16 AM, applefan1 wrote:

    Microsoft just raised the prices for Windows 8 and Windows 8 Pro.

  • Report this Comment On March 07, 2013, at 1:05 AM, justausier wrote:

    For myself, and the people I work with, and the people I have discussed the matter with, the entire problem with Win 8 seems to be no one asked for it. I have never seen this great throng that was supposedly crying out to the gods of Redmond to make their tablet and phone and desktop all look the same. And the idea of putting a touch screen on a desktop seems completely ridiculous. Why would I want to have to use my fingers all over the screen, and then have to type on the keyboard on the desk? It may be fun, but it surely is not productive. All MS had to do was insert a few lines of code, that asked the user if they wanted the old desktop or the new abomination at boot up. Leave the Metro garbage available, but ask me, don't tell me I have to use it, don't make me search CNET to find a program that I need to add on to get a start button. Every IT administrator in the world knows that more than half of the people using computers in the work place have no idea what is going on with the operating system, they just want to be able to use the stuff they are told to use without needing a degree from MIT to figure it out. They don't care if it's an app or legacy, they just want to do what they have been doing for 15 years and have it work. I agree that Win 8 is a great OS, at the core. It is solid and stable and very fast, but they messed it up with all the add on's that merely add distraction.

  • Report this Comment On March 07, 2013, at 2:01 AM, Drew9944 wrote:

    Its about time people realized Microsoft only makes money, other than its X-box, to the extent it "sucks profits out of its OEM customers". The reason Dell, HP, Toshiba, Sony and all the others who make Clone PCs using Microsoft Windows software make so little money, is because of what they must pay Microsoft. And most of their software is not even good, rather has been incredibly virus-prone and prone to freeze-ups and lost downloads over the years. Apple was able to make higher profit margins on their computers not only because it worked better (less virus-prone, easier to learn and use) and so they could charge more, but also because they didn't have Microsoft sucking profit out of them as HP ...etc. has.

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