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Microsoft’s Price Cut for Windows 8.1 Was the Wrong Move

By Leo Sun – Feb 26, 2014 at 11:18AM

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Microsoft is reportedly reducing its licensing fee for Windows 8.1 by 70% to try to gain ground against Google’s Chromebooks. Is this desperate effort too little, too late?

Microsoft (MSFT -0.80%) will soon drop its license fee for Windows 8.1 by 70% for lower-end PCs that cost less than $250, according to a recent Bloomberg report. That price reduction -- which reduces its $50 license fee to $15 per machine -- is squarely aimed at keeping Google's (GOOGL -0.94%) lower-end Chromebook and Android devices at bay.

A Google Chromebook. (Source: PC Advisor UK).

A lower price point might be a baby step in the right direction for Microsoft, but the company will still find it tough to compete against Google's free operating systems.

The rise of Chromebooks has spooked Microsoft
Last July, market research firm NPD reported that Chromebooks were the fastest growing part of the slumping PC market, claiming a 20% to 25% share of sub-$300 laptops in the U.S. By December, NPD reported that Chromebooks accounted for 21% of all commercial U.S. laptop sales in 2013, regardless of price range, and 10% of the entire U.S. market for computers and tablets -- up from 0.2% at the end of 2012.

However, those huge numbers should be taken with a grain of salt, considering that OS tracking site Net Market Share didn't record a subsequent spike in Chrome OS/Linux users in January. In addition, market research firm IDC's numbers indicate that Chromebooks finished 2013 with a 1% share of the global PC market, primarily due to its lack of a footprint in the enterprise market.

Although the numbers from NPD, IDC, and Net Market Share contradict each other regarding the Chromebook's actual market share, the numbers were alarming enough to force Microsoft to reconsider its growth strategy for Windows 8 and 8.1, which together account for 10.6% of all operating systems. Microsoft's own Windows 7 and XP remain far more popular, with respective market shares of 47.5% and 29.2%. Despite the growth of Chrome OS, Linux still only has a 1.6% sliver of the market.

Is Microsoft attacking the wrong target?
To combat the rise of Chromebooks and Android devices, Microsoft originally intended to scrap the license fees for Windows Phone and Windows RT to boost their respective market shares in smartphones and tablets/hybrids.

In my opinion, that would have made much more sense than reducing the license fee of Windows 8.1 from $50 to $15, since it would have represented a direct assault on Android. Instead, reducing the cost of Windows 8.1 is an attack on Chrome OS, which has far fewer users than Android despite its rapid year-over-year growth.

To understand why Microsoft should have made Windows Phone and Windows RT free instead of reducing the cost of Windows 8.1, take a look at the global market share that Microsoft holds in smartphones, tablets, and PCs, and compare the figures to the size of those three markets:

Devices

OS market share, 2012

OS market share, 2013

Devices shipped in 2013 (industry)

Expected growth by 2017 (industry)

Smartphones

2.3%

3.6%

1.013 billion

71.1%

Tablets

0.9%

3.4%

227.3 million

78.9%

PCs
(all Windows versions)

91%

90.6%

315.3 million (desktops and laptops)

1.4%

Sources: Net Market Share, Gartner, Forbes, IDC.

Rather than aggressively pursue two markets that will each grow by more than 70% by 2017, Microsoft is taking a baby step toward defending its dominant market, which is forecast to grow by an anemic 1.4%.

Microsoft's weakness isn't its price point -- it's its ecosystem
One point that Microsoft has repeatedly overlooked is the appeal of Google's ecosystem. Consumers are buying Chromebooks for the same reason they purchase Android phones -- the promise of being greeted by a familiar ecosystem of apps instantly synchronized to their Gmail account across multiple platforms.

Once users log in to a Chromebook, their email, Google Docs, Chrome bookmarks, YouTube channels, and calendars are all synchronized and ready to go. It can also synchronize data to a mobile device using the same apps. The same symbiotic relationship between the mobile device and the desktop exists on Apple (AAPL -0.34%) devices, where iPhones, iPads, and Macs can share data over the iCloud.

Microsoft has the right idea with its single sign-in system, but its cloud-based apps always feel second rate compared to Google's -- Outlook, SkyDrive, and Office Web Apps are adequate, but they aren't as light or user-friendly as Google's equivalent apps. More importantly, Microsoft's apps only synchronize seamlessly with Windows tablets or smartphones -- which account for less than 4% of mobile users. On Android and iOS, Microsoft users have to download separate apps to access all the features.

Microsoft machines. (Source: Microsoft)

Therein lies the problem -- Microsoft is worrying about winning back leading hardware vendors that have started producing Chromebooks, such as Hewlett-Packard (HP -3.29%) and Lenovo (LNVGY 1.54%), instead of focusing on boosting the adoption rate of its mobile devices.

Microsoft is already dominating the desktop and laptop markets, but it needs to sharpen its cross-platform cloud-based ecosystem to make its mobile devices more appealing to consumers who are usually dependent on Google's apps.

The bottom line
In conclusion, Microsoft's decision to lower its license fee on Windows 8.1 won't make much of a difference. It's simply a half-hearted, knee-jerk reaction to Google's Chromebooks that won't do much to boost its growth in mobile devices or improve its cloud-based ecosystem.

What do you think, dear readers? Will Microsoft's decision to reduce its license fee by 70% help it gain any ground in the lower-end market, or is it simply too little, too late? Let me know in the comments section below!

Leo Sun owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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