Windows 8 Pricing Cuts Are a Product Problem

There's a story going around that Microsoft is cutting the price of Windows by 70% to counter rivals in the lower-end of the notebook market, all the way to $15.  If true, it signals that they feel threatened by competitors in lower-end devices, as also signaled by their 'Scroogled' campaign.  (Disclosure: I used to work on Chromebooks years ago, but haven't for a long time, so these opinions are mine.)

It looks like an aggressive price cut, even if you take the fact that larger OEMs are really only paying $30 today, when you include marketing funds and so forth.  But it's going to cause more heartburn for Microsoft in the long run, because it's not just a pricing problem:

1.  $15 is still not free

Cut the costs all you want, charging $15 is still $15 more expensive than free alternatives.  Also, it's admitting that $50 was too much and they extracted a bit too much value, leaving a bad taste in partners' mouths.  They'll have to still offer significant additional incentives, like marketing funds, to bring the cost to $0.

2.  Windows 8 still sucks

It doesn't matter what you charge for it, consumers (and enterprises?) still don't want Windows 8.  It's not going to change the game in the lower-end notebook market where none of the devices have touchscreens and Windows 8 is designed around touch.  And even if Windows 8.1 fixes all of the problems that Windows 8 had, all you'll have a different flavor of Windows 7 on the device, which isn't much of a change from what they were selling years ago.  Not only that, but low-end Windows notebooks have far more overhead than other options and aren't powerful enough to run the industrial-strength Windows apps.

3.  Windows 9 now can't charge more

Now that they're charging a measly $15 per copy, what kind of deal do you think OEMs are going to want when Windows 9 (or Blue, or whatever it is) comes out?   You guessed it - $15!  Which means that the economics of their next generation of OS and devices have degraded significantly.  This could also build pressure to drop the price of Windows 8 on higher-end notebooks as well.

4.  The bigger cash cow is everything else that runs on the platform.  Why charge at all?

The Windows game is platform control: if Microsoft can control the platform on which developers write apps, and control the platform on which enterprise users use Word and Excel, they have a continuous stream of revenue forever.  However, it's becoming clearer that they have less faith in their platform, and will have to compete on someone else's platform to win.  By charging for the platform that they want to control, they will not achieve the same underlying protection for their real cash cow that they could if it were free.  If the price is a meager $15, why not bite the bullet and make it free to try to keep their platform in place?

5.  Mobile/tablet is the growth game now

As interesting and competitive as the low-end notebook market is now, the higher-end notebook market is really being eroded by mobile devices & iPads.  Cutting prices for Windows 8 on notebooks is not going to help Windows Mobile's position.  And cutting Windows 8 prices is not going to help Surface sales, since Microsoft makes them.

All that said, I'm not sure there's much else Microsoft could do to defend this part of the market -- it's not a pricing problem, per se, it's a product-market-fit problem.  I'm sure $50 would be an easy price for OEMs to stomach if Windows 8 were really stellar on low-end notebooks, but even at free, Windows 8 is still unattractive for someone who isn't stuck with learning how to use it.

A compelling offering for the lower-end of the market has to get rid of the usual Windows clutter, and it either has to be free, or has to be special and differentiated enough to warrant the price.  The product has to have several features:

• It has to be easy to maintain;  the majority of cost of an OS is the maintenance time
• It has to be low cost; the appeal of low-end notebooks is value
• It needs to be non-touch;  low-end notebooks don't have touch screens and probably won't for years (when that time comes, you can update back to live tiles)
• It has to be x86-based;  Windows on ARM got torched because it couldn't run anything

I'd shoot for a slimmed-down, non-touch-focused flavor of Windows that is free.  Less is more, so it doesn't have to have all the features of a full desktop OS.  It is far more strategic to own the platform market share on which developers build apps and continue to milk the Office cash cow for years to come.