Microsoft (MSFT): Vista Price Cuts

February 29, 2008 by Douglas A. McIntyre

No one in Redmond wants to admit this, but Apple’s (NASDAQ: AAPL) new Leopard OS may be getting the better of Vista, at least in enough cases to make it hurt. Almost all evidence points to the fact that Mac sales, although still a modest part of the overall market, are growing faster than PC sales.

Word has also leaked out the the specs for Vista were set in a way that lead users to believe that it would work well on low-end machines with weak processing power. Microsoft (NASDAQ: MSFT) knew that, but went ahead with its marketing, perhaps to gain additional sales. The standard may have been dropped to help Intel (NASDAQ: INTC) to hit sales targets

The world’s largest software company has decided to drop the prices on the consumer version of Vista. Some of this may be due to pressure from PC companies. As the prices of their machines come down, Vista becomes a bigger portion of the total cost of owning a computer. Firms like Dell (NYSE: DELL) and HP NYSE: HPQ) would like to see that changed so that they can keep unit sales as high as possible.

The net effect of Microsoft’s move may be bad for its earnings. It is rare that a drop in price, especially software, does not hurt gross margins. The company may want to help its PC and processor partners, but Vista may simply be lemon.

The best way to get rid of a lemon is to drop the price.

Douglas A. McIntyre