Microsoft Has Itself a Windows 7 Netbook Pricing Dilemma

A recent BusinessWeek story put a spotlight on how Windows 7 is going to create a smackdown between Microsoft and PC makers like Acer, Dell and Hewlett-Packard.

The reason? Windows 7 pricing. Laptop hardware prices have been plummeting and cheaper netbooks have been hot sellers. Neither of these scenarios is generating enough profit for Microsoft.

So what can the software giant do? Charge more for its shiny new OS, of course. This is more of a netbook problem than regulation laptop problem. For laptops, Microsoft charges PC makers between $60 to $150 for Vista. But that market has its own problems. Average prices for notebook computers have been cut almost in half since 2004, according to research firm IDC.

Cheaper netbooks are hot but are also not a profit generator for Microsoft. These low-priced small wonders came out of nowhere to experience explosive sales starting in the second half of last year. Netbooks costing less than $400 now make up one-fifth of total PC unit sales.

Microsoft is planning to charge PC makers $50 for entry-level Windows 7 Starter to go on netbooks, compared to the $15 the company has been charging for Windows XP on netbooks. On top of that, it plans to charge customers another $50 to upgrade to premium versions of Windows 7.

What will inevitably put Microsoft and PC makers at odds is that PC makers will feel squeezed out of making a profit. According to the BusinessWeek article, major netbook manufacturers like Acer and HP and others only make $20 in profits on a $400 Windows XP netbook. What choice do PC makers have when Microsoft triples the $15 XP price to $50 for Windows 7? Raise prices or risk making no money.

Or they could be forced to turn to that feisty underdog: Linux. Google will reportedly be putting its mobile OS Android on netbooks and major players like Acer and HP have announced plans to sell Android-powered netbooks. Why wouldn’t they? They would have to pay exactly nothing for Android upfront. Whether there will mass market acceptance of Android netbooks is another question entirely.

Nevertheless, it seems inevitable that Windows 7 will raise the prices of netbooks; this is a dangerous development for Microsoft for a couple reasons.

First, smartphones are getting more sophisticated by the minute, and the best ones can do most of the tasks of a netbook. The iPhone 3G is now $99. It does not behoove Microsoft to have netbook pricing go the other way while much of the culture is upgrading their smartphones. Research firm iSuppli forecasts that smartphone sales will grow by 11 percent in 2009.

Also, consumers and businesses alike have become accustomed to low PC prices. To turn on them and raise prices — even though Windows 7 is by all accounts a more modern and efficient OS than XP and Vista — would not sit well with cash-strapped buyers used to getting decent deals.

It is possible that jacking up netbook prices will change the public’s mindset away from netbooks and on to stylish, lightweight laptops running Windows 7. The thinking: ‘Hey, for $200 more than a netbook, I could get a full-on laptop that offers a similar experience to Apple’s MacBook Air!’ It’s a tough sell with so many people turning to netbooks and smartphones, but if the economy improves, it could work. It may be the only way for Microsoft to hit the jackpot with Windows 7.

What do you think?