Vista: Expect Premium Pricing

Research report says Microsoft will push users toward 6 core versions

Microsoft is still holding many specifics about Windows Vista—pricing among them—close to the vest. But Redmonds reticence to talk isnt stopping company watchers from speculating.

Goldman Sachs & Co. analyst Rick Sherlund issued a research note April 3 noting that Goldman is now figuring Microsoft could garner an extra $1.5 billion per year in revenues simply by persuading users to buy the premium Vista versions.

Microsoft announced earlier this year that it is readying six core Vista packages, or SKUs: Windows Starter 2007, Windows Vista Enterprise, Windows Vista Home Basic, Windows Vista Home Premium, Windows Vista Ultimate and Windows Vista Business.

In February, company officials reiterated Microsofts goal to persuade more customers to opt for Vistas premium SKUs—specifically, Vista Enterprise, Vista Home Premium and Vista Ultimate—when selecting their next-generation Windows operating system. Rather than upping Windows Vistas price, Microsoft will be able to maintain and grow its Windows revenue by getting people to buy in at a higher price point, company officials said.

Looking at the pricing of Windows XP today might give a hint at what to expect for Vista pricing. Currently, the street price of Windows XP Home is $99 per copy for an upgrade, and $199 for a full version. For XP Professional, those prices are $199 and $299, respectively. Windows XP Media Center Edition, which is an example of a current-day "premium" version of XP, sells for $320-plus.

Retail sales comprise a relatively small part of Microsofts Windows business, however. Microsoft obtains more significant shares of its Windows revenues from PC makers on the consumer side and volume licensees on the business side.

Goldman Sachs estimates that Microsoft is charging PC makers roughly $45 per copy of Windows XP Home and $85 per copy of Windows XP Pro. While the Vista SKUs do not line up feature by feature with their XP predecessors, Goldman is estimating that Microsoft will charge PC makers $45 per copy of Vista Home but about $65 per copy for Vista Home Premium, which includes Media Center, Tablet and other functionality built into a single SKU. (It is up to PC makers to determine how much, if any, of a Microsoft Windows price increase they will pass on to customers when selling new systems preloaded with Vista.)

"We think most of the Home market would elect the Premium version since this has the Aero/Glass interface and ability to burn DVDs and related multimedia," said Sherlund in New York. "We have been more focused on the incremental upgrade revenues from Vista, but the bigger benefit over time is the mix shift to a higher-priced Windows SKU."

If that $20 extra per copy for the premium home edition calculation holds, Microsoft will earn $1.5 billion a year in additional revenues, just by switching its product mix, Sherlund reasoned in the research note. The change in its Vista revenue forecast led Goldman to revise its Microsoft projections, increasing its Microsoft fiscal 2007 earnings per share figure from $1.54 to $1.57 and its 2008 estimate from $1.75 to $1.78.

On the enterprise side, the calculation is not quite as clear-cut, but the logic still holds. If Microsoft can persuade business users to flock to the Enterprise edition rather than the less-feature-rich Business variant of Vista, Microsoft will be able to reap significant revenue returns, even if the actual price per copy increases little or none.

Microsoft is using more of a stick than a carrot on the business side to persuade customers to go with the premium Enterprise SKU. The company has decided to make a number of the Vista features that it has honed for enterprise users—specifically, the BitLocker drive encryption; Virtual PC Express virtual machine support; the SUA (Subsystem for Unix-based Applications), which is designed to allow Unix applications to run on Vista machines; and access to all worldwide languages supported by Vista via a single deployment image—available only to users who agree to sign up for Microsoft volume licensing agreements, such as Enterprise Agreements and Software Assurance.

In addition to overcoming these kinds of negative perceptions, Microsoft has some other issues with which to contend before its premium push will work, company watchers said.

"It would appear that [Microsofts] goal is get people onto Vista and, as they use it, get them to pay to move to the next edition," through programs such as Windows Anytime Upgrade, said Michael Cherry, an analyst with Directions on Microsoft, in Kirkland, Wash. "But the problem here appears to be the unknown hardware requirements," Cherry said.

Cherry added that the customer set for which the effects of Microsofts planned premium strategy are most murky is SMBs (small and midsize businesses).

"What is really unclear here is how this will play out for the small to medium-sized business, [which] are not likely to have [volume license] agreements but rather buy from OEMs. Will they be forced to buy [Vista] Ultimate?"