What’s Driving Windows 8 Pricing?

Today Microsoft announced that anyone with a copy of Windows XP, Vista, or Windows 7 can upgrade to Windows 8 Pro for $39.99.

My first thought was that this is a smart move my Microsoft. A low price may very well drive momentum for Microsoft’s newest and most controversial version of Windows in years.

Microsoft knows that Windows 8 is going to sell hundreds of millions of copies no matter the reception. Microsoft also knows that the last thing they need is a Vista-type reception that bleeds over into Surface and Windows Phone sales. That’s a downside of tying the Windows brand to as many devices as possible.

But the actual price of the upgrade have longer term effects on Microsoft bottom line because, although the jury is still out on whether Microsoft can becoming a player in smart phones and tablets, Windows will be around for many years. You can’t ignore the fact that Microsoft is dropping the price of Windows upgrades from $199 for Windows 7 Professional or $119 for Windows 7 Home Premium to forty bucks for Windows 8 Professional.

Does Microsoft expect to make up the difference in volume? Given projected PC sales that’s hard to imagine. Maybe pressure from the OEMs made Microsoft reconsider a lower price for Windows given decrease in average selling price of the PC.

Whatever the reason, you can bet that Microsoft is feeling the heat. It’s been nearly 30 years since any competing platform has approached the PC in sales. But already this year, Android passed the PC in total units shipped and iOS is poised to follow. This chart from Horace Dediu at Asymco tells the story.

I always felt that the price of Windows should come down as the price of the PC decreased. But for many years, the opposite happened because Microsoft felt no competitive pressure to do so.

Could it be that by the time you realize you must lower your price it’s actually too late? It won’t take long to find out.