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By Ina Fried, 29 February 2008 08:30

NEWS

In what may be an unprecedented decision, Microsoft has said it plans to lower the retail prices for several versions of Windows Vista.

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For those in the US, Microsoft is cutting prices only on the higher-end versions of Vista, and only for the upgrade version used to move from an earlier copy of Vista. The suggested price for Vista Ultimate drops to $219 from $299, while Home Premium falls to $129, from $159.

Other developed markets will also see price cuts, while in emerging markets, Microsoft is eliminating the distinction between full and upgrade versions of Home Basic and Home Premium as it attempts to convince more users there to use genuine software.

Analysts were surprised by Microsoft's move.

Analyst Chris Swenson, who tracks retail software sales for NPD Group, said: "I can't remember a big price cut like this. It's very unheard of."

Microsoft finalised Windows Vista in late 2006 but held back its retail launch of the product until January 2007. It has sold more than 100 million copies, largely on the back of a strong overall PC market, but retail sales have significantly trailed those of XP in its early days and Vista has received a number of critical reviews.

In an interview, Windows consumer marketing vice president Brad Brooks said Microsoft has been testing lower prices over the past few months and was surprised to find the amount of revenue lost was more than made up for by an increase in the number of PC buyers willing to shell out for an upgrade.

Brooks said Microsoft had done a lot of research prior to Vista's launch, but noted that both Home Premium and Ultimate were new products for the company. He said: "We probably got the pricing mix wrong. You don't always get it right but you make the adjustment."

Gartner analyst Michael Silver said the move - which applies only to standalone versions sold at retail stores - is puzzling. "It's sort of an odd move," said Silver, who noted that the market for such upgrades is fairly limited. Those who bought XP in the fourth quarter of 2006 got a coupon for a free Vista upgrade, while most of those who have bought systems since then have got Vista. Machines purchased prior to 2006 probably aren't all that attractive as candidates for a Vista upgrade.

He said: "I guess at the end of the day anything that makes Vista a little bit more accessible is probably a good thing." but added that a cut in the price computer makers pay would have a far bigger impact, given new PC licences account for 80 per cent of Vista sales. Silver added: "The whole notion of upgrading PCs has sort of fallen by the wayside."

And, a retail price cut could actually hurt Microsoft when it comes to the market for new PCs and among businesses trying to decide when, or whether, to move to Vista.

He said: "To the extent this ends up damaging Vista's reputation instead of broadening its appeal, I think that's a danger."

Microsoft's Brooks discounted that, saying if that were the case, Microsoft would have seen sales drop rather than rise when it tested the lower price promotions in France and the UK in December and January. As for the limited market for upgraders, Brooks said the new pricing should also make it more attractive for existing Vista PC owners that want to move to a higher-end version.

Brooks also pointed to the increase in sales Microsoft saw when it cut the price to computer makers for Windows XP Media Center Edition. Initially pitched as a high-end version above Windows XP Pro, Microsoft eventually lowered the price to not much higher than Windows XP Home and saw it become the dominant consumer version.

Brooks said: "It went from a run rate of about one million [copies] a year to a run rate of several tens of millions a year. So yeah, we got it right."