MoneyWatch Tech

Microsoft Argues for Cheaper Computers and Less Profit

By Erik Sherman

Updated on: April 10, 2009 / 2:10 PM EDT / MoneyWatch

In its current anti-Apple marketing thrusts, Microsoft is creating a dangerous dilemma. Slowly but surely, the PC software giant is building the argument that PC prices should drive downward as fast as possible, and that its own considerable revenue cut should dwindle.

As Tom Krazit at CNET has pointed out, Microsoft has played into Apple's hands with the company's latest advertising campaign.

Microsoft has essentially conceded that [Macs offer a superior and hipper computing experience than Windows-based PCs]. As others have noted, Microsoft's shoppers don't ever wonder about the relative merits of Finder versus Windows Explorer in its latest series of ads. Instead, they focus completely on trying to make a hardware-to-hardware price comparison between various notebooks.

Krazit posits that Microsoft has given support to "the idea that Macs are an aspirational product," and that when the economy rebounds and Windows 7 comes out, it will be hard for Microsoft to argue that it offers a better user experience.

But the problem for Microsoft, and for all of its hardware vendors, goes far deeper into the bottom line. The company has essentially argued that the only thing that matters with any personal computer is price. You buy a PC instead of a Mac because of price is the first step. What are the other deductions that follow?

You buy one brand PC over another for price only, because, after all, that's the big differentiator.
Operating system brand and design doesn't matter, so long as the cost of one machine is cheaper than another.
The range of available software doesn't matter because, after all, the big issue is machine price.

What Microsoft has essentially done is tell hundreds of millions of consumers that they should compare computers based on price alone for some set of generic features. Not the relative quality of components. Not performance. Price. Welcome to the hardware vendor's nightmare. If nothing matters but the number at the register, you cannot sell the consumer on additional value, because anything other than a lower price is of no interest.

I mentioned the other day that the $100 PC, monitor included, is well on its way. It hasn't arrived, but the emergence, possibly within 18 months, is almost inevitable because of competition in a market already highly fueled by price sensitivity, and because the price of components is just that cheap.

Not only will vendors face this pricing dilemma, where there is going to be literally only a few dollars available as gross profit on many computers, but that the most expensive component will soon become the operating system. What happens then? They look at Linux. They look at Android. They look at anything that helps reduce the checks they send to Redmond.

And what happens to Microsoft? It now falls under pressure to drastically reduce its OEM pricing for Windows so that the vendors can continue to support the downward price pressure. That's not running MSN at a loss. That's not relatively low revenue from game consoles. That goes straight to one of the two columns that upholds 80 percent of Microsoft's revenue stream. Microsoft is using the nail gun on the coffins of its PC hardware partners as well as its own.

Parachuting image via stock.xchng user jhallam, standard site license.