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Wednesday, January 12, 2005

PC Mini & Microsoft OS/Desktop Applications Pricing

Joe Wilcox has done an excellent analysis of the cost structure of PC and steps microsoft need to take to bring PC prices down. Excerpts with edits and my comments added:

Apple develops Mac OS X, which costs are rationalized as part of research and develop. PC manufacturers must license Windows from Microsoft. While Microsoft does not release OEM pricing for Windows, court documents suggest that, at least as recently as three years ago, costs remained fairly level over about 10 years.With the OS price fairly constant and likely more for Windows XP Media Center Edition and Windows XP Tablet PC Edition (because they're based on XP Pro), the operating system cost as a percentage of the total cost of the computer increases as the price drops, which cuts into OEM margins. Keeping Windows can compel OEMs to cut costs elsewhere. Apple has already paid for its OS through R&D.

Some OEMs are breaking rank as they look for more niches in the living room. HP announced a DVR box last week, but not running Windows, even though Microsoft makes highly-functional TV/DVR software. HP's decision highlights the OS cost problem. Windows XP Media Center Edition on a mid-range or high-PC is more production-cost effective than on a low-end box. Microsoft should release a Windows XP Media Center Embedded version for living room devices and discount based on features used.

Apple also develops the major digital media suite for the Mac, iLife, and, again, rationalizes the cost as part of R&D. The iLife suite adds tremendous value to Mac mini, for which the customer pays nothing extra. PC manufacturers would have a more difficult time cobbling together a comparable offering. Even if they could, unless developers offered deep discounts, like with the operating system, the cost as a percentage of the PC would go up as the price goes down, narrowing the OEM's margins.Apple has maintained its cool image with good pricing ,perception of good quality and being regularly innovative.

My Take: Microsoft has to move fast and change the rules of the game on the pricing front, otherwise its plan to be the dominant player in the living room battle would go bust.

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