Daniel Eran Dilger
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Microsoft plans to use Windows 7 to raise netbook prices

Prince McLean, AppleInsider
The prospects of a premium priced Apple tablet computer may brighten at the hands of an unlikely ally, if Microsoft can carry out its stated goal of raising netbook prices using Windows 7.
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Microsoft plans to use Windows 7 to raise netbook prices
After publicly advertising the idea that Windows PCs are cheaper than Macs in its “Laptop Hunter” ads, Microsoft CEO Steve Ballmer told an audience of financial analysts that the company’s attempts to cut prices of Windows to induce demand in emerging markets had failed over the previous year, and that the solution to the company’s woes will be to increase the price of computers.

“The theory was wrong,” Ballmer said, explaining that there wasn’t enough new demand to make up for the drop in profits. “You’ll see us address the theory. We’re going to readjust those prices north [using Windows 7].”

Reporting on the event, Peter Burrows of BusinessWeek wrote, “the company’s goal is to raise PC prices in the next year. That’s due both to expected popularity of a new class of higher-end and higher-priced netbooks, a new pricing strategy around Windows 7 that the company hopes will result in far more upgrades to premium SKUs, and a reversal of a strategy in the last year to cut prices to spur demand in emerging countries.”

Lower competition, higher prices

The netbook segment of the PC market, introduced by a line of low cost, simplified mini-notebook models Acer debuted running Ubuntu Linux, captured the attention of PC sellers during Windows Vista’s first year. The emergence of the new devices priced in the ballpark of $300 caught Microsoft off guard, and helped spoil the launch fireworks of Vista because the new operating system wasn’t capable of running on the new stripped down machines.

Microsoft worked to eradicate Linux netbooks by pushing its PC partners to license Windows XP for next to nothing. This did nothing for Vista, but did result in the company being able to advertise that the new netbook category was still dominated by Windows. Moving forward, the capacity of netbooks to run Windows 7, which will not be offered for free, has been a major issue for Microsoft and its PC partners.

However, based on Ballmer’s own comments, the ability of netbooks to run Windows 7 will involve both a redefinition of what a netbook is and a change in pricing, because Microsoft does not want to continue making lower and lower margins on the PC operating system software business it monopolizes.

Ballmer laughs off Apple gains

Burrows’ report also noted that Ballmer laughed off the number of financial analysts in the room using Apple laptops. “We have low share in the investor community. I see a lot of Apple logos,” Ballmer said. “Don’t bother to hide them. I’ve already counted them. And it’s okay, feel free [to use them], so long as you’re running Office.”

Ballmer called Apple as a “fine company” doing well with a low-volume, high-price strategy, but claimed Microsoft hasn’t lost market share to Apple over the past year, and that any changes in reported share numbers are just “a rounding error.” Share gains by Apple “cost us nothing,” Ballmer said. “Hopefully, we’ll take share back from Apple. But they still sell only 10 million PCs a year, so it’s a limited opportunity.”

Somewhat ironically, Microsoft has also been trumpeting its own tiny market share gains with its renamed search engine, despite having actually lost market share in the search business over the past few years. Additionally, Microsoft’s gains have come out of the hide of Yahoo, which it hopes to team up with as a parter to take on Google.

  • Hakalau Tom

    First, Mr. Ballmer’s reaction to a sea of Apple logos reminds me of the thin skin of Lyndon Johnson. May Ballmer never gain political power.

    Second, the main discussion, as reported by Business Week, reeks to me of illegal collusion. The Fed’s previous anti-trust action against MSFT died soon after the Bush 43 came into office. Might we see another round?

  • http://bkpfd.org qka

    Let me get this straight….

    Microsoft is appealing to those who want to spend less.

    Microsoft wants to raise the prices folks pay.

    Does Microsoft know anything about economics, specifically about the theory of the price – demand curve, i.e higher prices dampen demand, lower prices increase demand.

    Further, by raising their prices, they come closer to Apple’s prices, reducing the factor which they have been attempting to use as a differentiator.

    Does any of this make any sense to anyone outside Microsoft and its circle of fanbois?

  • fatbarstard

    QKA is right – Microsoft’s attempts at economics just don’t make sense…

    And the other thing… if Apple is so irrelevant according to Ballmer why is he talking about the company so damn much?? If he really didn’t care he would just ignore Apple but he just doesn’t shut up…

    My read on this is Microsoft are seriously worried about the outlook for Windoze 7 and are priming the analysts with talk of a price hike to smoke screen the likely sales numbers….

  • patriot

    qka pretty much summed up my thoughts. Ballmer’s statements are ludicrous as usual. He notes how the vast majority of his audience is using Macs, gives them permission to use them (LOL), then says Microsoft hasn’t lost market share to Apple. The netbook market is huge BECAUSE it is cheap. If it wasn’t cheap, it wouldn’t be huge duh. People won’t pay more for a netbook to get Win 7. They’ll pay the same to get Linux or Chrome OS. Microsoft would need an incredible change in leadership and philosophy to survive the coming years as anything other than the steward of XP until it becomes hopelessly dated even for the most limited uses. And as for the Office that Ballmer requires the journalists to use in order to use Macs? Wave goodbye to that monopoly too. No OS monopoly = no bundling Office monopoly. Embrace open standards and open source. Embrace the future Ballmer.

  • westech

    What Ballman doesn’t appreciate is that the iPhone is a computer in this market segment, and it looks like Apple will sell 25,000,000 of them this year, plus maybe 15,000,000 iTouches. The iTablet will be a larger form factor of these. It will sell in the $600 to $800 price range. Microsoft has already lost the market share war for this product segment.

  • Jesse

    Open source FT… L.

    But iWork is pretty sweet.

  • Per

    I hear that Kim Jong Il is a very intelligent man but that doesn’t mean that what he does makes any sense. Ballmer fits into the same category.

  • John E

    yes, Ballmer’s fixation with Apple is obvious. and strategically stupid. MS just needs to copy/knock off the Mac OS – as Win 7 blatantly does – but should never even mention Apple.

    there is only one way prices for Windows and Office can go long term – downward. as commodity products with more and more competition every year, that is inevitable and there is nothing Ballmer can do about it.

    the Win CE/Mobile guy was a bit more realistic about its current problems, but of course could not admit it is certain now to become a permanent also-ran, marginalized by Nokia/Symbian on one side and Google/Android on the other in the licensed smartphone OS market, while the integrated hardware/software alternatives of iPhone and RIM capture the top end of the market.

    and netbooks … what consumers really want to go with a small convenient screen is a simplified easy OS. which Win 7 is definitely not. not even “home basic.” hello Chrome … maybe the right idea at the right time next year. but while Apple of course attacks first with the iTablet from the other smartphone direction in just a few months …

    why haven’t they fired that fool?

  • http://blog.burlock.org Neil Burlock

    I read the FAM transcript and it’s full of stuff like this. Admittedly the presentation was intended to soothe the nerves of jittery financial advisors, but if we assume that Ballmer believes even some of what he said, then he’s living in a fantasy world where the customer wants what’s best for Microsoft.

  • wanorris

    Microsoft offered XP Home to netbook makers for something like $15 a copy to get entry into the market. Now they’re looking to raise it back to its more traditional price of $50 or so. Most netbooks sell in the $300-500 range, so I doubt that adding $35-50 to the retail price is going to prove crippling to the whole market, especially since new models keep rapidly adding features (and often pricepoint) anyway. It’s hard to imagine people saying, “well I was going to buy a $300 netbook, but now that they’ve raised the price $40, I might as well spend the $999 and spring for a MacBook.”

    John E — “what consumers really want to go with a small convenient screen is a simplified easy OS.” Actually, if you follow how the market’s been moving, what most people seem to want is a small, light computer, often with great battery life, that still runs all their old applications. That’s why the netbook market shifted enormously to XP systems from Linux as soon as the choice was available — consumers were confused that all the same things didn’t work.

    I imagine this move will open up an opportunity for the ARM-based “smartbooks” currently in development in Taiwan, especially if they can hit the $199 and $249 pricepoints, but it still remains to be seen if the mass market will accept systems that look like computers (as opposed to phones or whatever) but won’t run common PC apps like Office that people are used to.

  • FreeRange

    The only reason MS came up with the low cost windows “lite” version for the developing markets was once again for anti-competitive reasons – to put a nail in the emerging Linux efforts by projects like the one laptop per child program, and others. They were scared to death that they would lose the future business of an entire emerging geographic regions and a whole generation of future users, IT managers and developers. This was the first really great shot for Linux to finally get a strong foothold and MS killed it. This company needs to be broken up once and for all and its thuggery finally put to an end.

  • wanorris

    Is it anti-competitive, or just old-fashioned competitive? If your company is losing market share due to being priced too high for a segment of the market, offering a lower-cost product aimed especially at that segment is Marketing 101.

    Is Microsoft really obligated to say, “Oh, we seem to be losing share. Time to pack it in and give up, I guess.”?

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