Microsoft has cut the price of Windows 8.1 by nearly three-fourths to device makers who produce lower-cost laptops and tablets, according to a report from Bloomberg Friday.
Citing sources who asked not to be named, Bloomberg said that licenses for Windows 8.1, normally $50, would instead cost OEMs (original equipment manufacturers) just $15. The discounted licenses would only be available for hardware that sold for less than $250.
The steep discount -- 70% less than the usual price, half that of the lowest price when Microsoft co-marketing money was included in the equation -- was a reaction to cheap rivals to Windows hardware, particularly Chromebooks powered by Google's free-to-OEMs browser-based Chrome OS, Bloomberg said.
While the news agency did not spell it out, Microsoft is also threatened on the low end by cut-rate tablets running Google's Android, which is given to OEMs free of charge, or nearly so.
"Competing with Chromebooks may be a motivator, but likely the bigger motivator is in tablets," said Ross Rubin, an independent analyst with Reticle Research. "Microsoft still has a dominant share of the clamshell market, but it is far behind in tablets. That's a form factor where Windows 8.1's touch capabilities represent market expansion. That's where it really needs to gain share. The pricing competition in smaller form factors is even more brutal than it has been with Chromebooks."
How much Chromebooks are pressing Microsoft's business has been in dispute. While the cheap laptops, made by everyone from Samsung and Dell to HP and Asus, sold well last year in commercial distribution channels -- the outlets schools and some businesses use to purchase hardware -- their overall impact as measured by online users has been small.
But Microsoft has been alarmed enough about the Chromebook threat to take the offensive in ads that diss the machines as useless for real work.
The Verge weighed in on the Windows discount, as well, claiming that the price cuts are linked to the upcoming Windows 8.1 Update 1 and a change in that revision that will automatically send users of non-touch hardware to the traditional mouse-and-keyboard desktop.
By letting users bypass the touch- and tile-centric "Metro" user interface (UI) of Windows 8 and 8.1, Microsoft has recanted its "make-them-eat-Metro" strategy, one of the key tenets of the company's plan to gain ground in mobile, analysts have said.
The devices eligible for the cheap Windows 8.1 licenses will not be required to complete Microsoft's complicated logo certification -- a process that guarantees hardware works with the operating system -- said The Verge, and do not need to be touch-enabled. The latter exemption was aimed at traditional clamshell-style notebooks, as tablets demand touch.
"It wouldn't be too surprising," said Rubin when asked about the likelihood Microsoft has selectively slashed Windows pricing. "Microsoft has defended the licensing price of Windows, arguing that it does more and provides more value. However, it has made other concessions, particularly in the low price/small display tablet market, throwing in a version of Office."
Rubin was talking about reports a year ago that Microsoft discounted a combination Windows-Office license to $30 from the usual $120; later, Microsoft reportedly offered small tablet makers an Office 2013 license for free.
Other precedents exist for Microsoft's price cuts, such as during the heyday of "netbooks," the cheap, lightweight and underpowered notebooks that stormed into the market in 2007. Netbooks peaked in 2009 as they captured about 20% of the portable PC market, then fell by the wayside in 2010 and 2011 as tablets assumed their roles and full-fledged notebooks closed in on netbook prices.
When netbooks first appeared, they were powered by the open-source Linux, a threat to Microsoft's Windows revenue. In response, Microsoft hijacked netbooks with Windows XP, extending the sales life of the even-then-aged OS, then created Windows 7 Starter, a cheaper and purposefully crippled version, to sell to OEMs.
The landscape is quite different now than during the high-water mark of netbooks: PC shipments contracted 10% last year, an historic downturn; Android and Apple iOS-powered tablets continue to attract consumers' dollars that otherwise might be spent on a new PC; and Windows 8 has received an apathetic, at times antagonistic, reaction from customers.
Microsoft may also be trying to mend a fence or two with OEMs with the price cut. Computer makers, even the most stalwart of partners, were taken by surprise in mid-2012 when Microsoft began directly competing with them using its Surface line of tablets and 2-in-1s. Slowing sales, especially to consumers, have been blamed on a host of problems by the OEMs, including Windows 8 and even Windows 8.1. Some have begun experimenting with Chrome OS or even Android as the backbone for their personal computers.
Two weeks ago, Microsoft's top marketing officer, Tami Reller, hinted that the company is trying to do better by the OEMs. "We'll just do everything possible in the OS itself, and then in the other programs that surround it, to make it easy for OEMs to deliver very competitive products," Reller said, after touting a $279 Windows notebook Microsoft had recently used as the focus for its advertising.
There are currently few sub-$250 Windows devices, either tablets or notebooks. On Saturday, Microsoft's online store showed just one, a Dell Venue 8 Pro tablet on sale for $229. Meanwhile, of the 12 notebooks priced less than $300 at Amazon.com, all but two were Chromebooks. The pair of Windows systems were priced at $280 and $300.
Rubin saw a sliver of a silver lining in the price cut for the Redmond, Wash. technology firm. "Microsoft may even see some benefit from the cut as it contemplates smaller versions of Surface or future Lumia devices, [because] it has charged itself a license fee to remain fair to OEMs," said Rubin.
The below-$250 cutoff for the discount would seem to favor smaller tablets, those in the 7-in. or 8-in. category. Some analysts and pundits have claimed that Microsoft will enter the diminutive tablet market with a scaled-down Surface this year.
"We love the small form factors, too, and we will make sure that Windows is amazing in those categories, too," Reller said during a Q&A Feb. 13 at a conference hosted by financial firm Goldman Sachs.
Microsoft recently claimed that it had sold 200 million Windows 8 and 8.1 licenses since the original's debut in October 2012, a milestone that Computerworld calculated overstated the number of systems currently running the operating system by between 16 million and 31 million.
According to Web analytics firm Net Applications, Windows 8 and Windows 8.1 accounted for about 10.6% of the operating systems that powered personal computers used online in January. That was less than half the user share of Windows 7 and not much larger than the 9.4% controlled by Windows Vista at the same points in their post-launch timelines.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is email@example.com.
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