Pricing Malfunction: How Microsoft will Bungle the Windows 7 Launch

The reviews for Windows 7, even during the beta, have been stellar and stand in stark contrast to those of its predecessor, Windows Vista. Indeed, the level of excitement Microsoft is experiencing around the next Windows version is unprecedented this decade, which is a sign that its customers are finally ready for an upgrade. And with Windows 7 speeding toward a mid-July finish line, there's almost no way the software giant could screw things up now, right?

Wrong. Microsoft has yet to publicly announce its plans for Windows 7 licensing and pricing. And this final piece of the Windows 7 puzzle—arguably the most important piece—will ultimately determine how successful the OS is. Unfortunately, it seems that Microsoft is getting ready to hobble Windows 7 by making it too expensive and, to a lesser degree, too difficult for most of its customers to upgrade.

As noted previously, Microsoft has yet to announce Windows 7 pricing. But a variety of its suppliers and partners have leaked Microsoft's plans, and the news isn't positive. In stark contrast to its leading OS competitor, Apple, which is offering its next desktop OS (Mac OS X Snow Leopard) for a paltry $29 to those who already own the most recent version (Leopard), Microsoft is apparently getting ready to raise prices.

According to a report in DigiTimes, Microsoft will raise the cost of the lowest-end Windows 7 version, Windows 7 Starter, to $45–$55 when licensed for use on a netbook computer. This is a dramatic increase over the cost of licensing Windows XP on netbooks, which is about $15–$35. This follows news from a Dell executive, Darrel Ward, who said last month that the average selling price of Windows 7 will be "higher than they were for Vista and XP ... licensing tiers at retail are more expensive than they were for Vista." He specifically noted that Windows 7 Professional would be more expensive than the Windows Vista version it replaces (Vista Business).

Now, we know Microsoft is at least aware of the global financial crisis. The company experienced its first ever year-over-year drop in Windows revenues in the most recent quarter, and it recently completed most of its planned 5,000 jobs cuts.

Microsoft will apparently try to ride excitement about the new OS by lowering prices for those who want it the most, at least temporarily. According to a leaked memo from Best Buy, Microsoft's retail partners will temporarily pre-sell Windows 7 Home Premium and Professional for 16 days in late June and early July at vastly reduced prices. The Best Buy memo cited a $50 cost for Windows 7 Home Premium Upgrade and $100 for Windows 7 Professional Upgrade. PC makers will also be supplying free copies of Windows 7 to those customers who purchase Windows Vista–based PCs after a certain (yet to be revealed) date. (Microsoft has offered a similar program for all modern versions of Windows.)

While an anxious Windows community awaits Microsoft's pronouncements about pricing and licensing, there's another issue looming for Windows 7. Customers with Windows Vista will be able to easily upgrade from that OS to Windows 7 when it's released, but most Microsoft customers are still running Windows XP. And those users won't be able to upgrade (though they will qualify for upgrade pricing). Instead, they can use a Windows 7 utility to perform a migration, in which Windows 7 is installed on a PC and then the user's settings and documents are copied over. In a migration, however, applications don't make the trip, so the user is responsible for reinstalling and reconfiguring them, a process that will be lengthy and potentially difficult.

Another gotcha for XP users involves so-called downgrade rights, in which a purchaser of a Windows license or Windows-based PC can opt to "downgrade" to an older Windows version, usually XP. Starting next April, Microsoft will no longer offer downgrade rights to Windows XP, a move that could make life difficult for those companies that choose to stick with XP past that date. To get around this limitation, businesses can enroll in Microsoft's Software Assurance (SA) volume licensing program, which will incur a per-PC yearly fee. (SA customers can actually downgrade to virtually any Windows version dating back to 1995, including, yes, Windows 95.)

Microsoft could easily sidestep most of these issues by making Windows 7 more affordable than its predecessor and by rewarding key customer groups with discounts. For example, the company should offer multi-PC licensing as Apple does with Mac OS X, instead of requiring individuals to buy new copies of Windows for each computer they own. And those that bought into Windows Vista Ultimate could be rewarded with extremely low-cost upgrades since Microsoft never really came through on its promised Ultimate-specific enhancements.

It's unreasonable to expect Microsoft to offer Windows 7 for $29. The leaked Best Buy pricing—$50–$100 for an Upgrade version—is a fine place to start. Microsoft, Windows 7 is too good to screw up with old-school pricing and licensing. This product should be inexpensive, and it should get even cheaper when a customer buys multiple copies.

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