Microsoft (MSFT) May Offer Huge Price Cut For Windows 7 Pressuring Margins

Microsoft (MSFT) may price Windows 7 as low as $100 to offset the effects of the recession on PC operating system sales and the public’s rejection of Vista, the current version of Windows.

The price cut would be unprecedented. It could drive up sales of Microsoft’s software and PCs in general. It could also put intense pressure on Redmond’s margins and sales.

According to ComputerWorld, Microsoft has already slashed the licensing prices for Vista in an attempt to revive anemic sales. Window 7 is viewed as a better product, so a $100 price point could get customers back into the habit of updating their operating systems with each new version of the Microsoft’s system.

A price cut for Windows 7 could be a big boost for PC companies like Dell (DELL) and Hewlett-Packard (HPQ) as people and businesses replace computers to get the latest OS. That, in turn, would help chip firms Intel (INTC) and AMD (AMD). All of these companies have suffered sales drops for two reasons. One is the recession. The other is problems with Vista that Microsoft has not been able to entirely overcome. Many PC owners have elected to stay with Windows XP, the generation of the operating system that was sold before Vista was launched.

Microsoft is taking a big gamble. Its Windows franchise is critical to the company’s sales and, in turn, its earnings. A discounted version of Window may sharply drive up unit sales, but the revenue that Microsoft will have to give up is probably significant.

With operating systems from Apple (AAPL) and Linux gaining ground, Microsoft’s revenue sacrifice may be its only path to remaining the dominant provider of PC software.

Douglas A. McIntyre