Microsoft Cuts OEM Costs as Windows 8 Adoption Falls Below Vista

Microsoft is responding to a less than robust uptake of new Windows 8 devices by cutting the licensing costs for its original equipment manufacturing (OEM) partners.

The early numbers aren't looking good, with Windows 8 use trending lower than Windows Vista use at four months after operating system market launch, according to Net Applications' data. In February, Net Applications reported Windows 8 use at 2.3 percent of desktop use. In contrast, Windows 7 was trending at 9 percent of desktop use after four months of launch.

Microsoft officially launched its new Windows 8 operating system in October. The company has reported selling more than 60 million Windows 8 licenses by January 2013, although it's not clear that all of those licenses were activated. Some of the licenses may be stockpiled by OEMs. 

There are many reasons for the lackluster Windows 8 adoption. Price is one of the factors, and Microsoft seems to be responding. The Wall Street Journal and DigiTimes, citing unnamed sources, both reported that Microsoft is offering its OEM partners discounted licensing on a Windows 8 and Office bundle for some touch-screen systems at a cost of $30, instead of $120.

Jay Chou, a senior research analyst for IDC's Worldwide Quarterly PC Tracker, confirmed that this discount was offered to OEMs.

"It was tough to get them [Windows 8 machines] down to a reasonable price," Chou said in a phone interview. "And this and the fact that Windows 8 itself has been hard to use for many people is part of the reasons why Microsoft is lowering its OEM licensing costs. This is mainly targeted at notebooks, and especially notebooks that have touch screens."

Microsoft had no direct comment on the purported discount to OEMs.

"As we've said before, Windows 8 was built to scale across all sizes of PCs and tablets -- large and small," a Microsoft spokesperson stated via e-mail. "We continue to work with partners to ensure that Windows is available across a diverse range of devices."

Veteran Microsoft watcher Mary Jo Foley has speculated that the OEM discount could be just the price for smaller devices, perhaps even for some sort of yet-to-be-announced "mini" Windows 8 tablet.

Touch-Screen Costs
One of the factors dogging Windows 8 is its touch-centric user interface, which has confused some users, according to Chou. Windows 8 was rolled out even though touch-screen hardware has been either unavailable or too expensive, he added.

"In October, when Windows 8 officially launched (the one that runs on x86), people also had trouble toggling between the user interfaces -- between the modern UI and the traditional one," Chou said. "There were also some cost concerns where Microsoft had positioned touch as the overwhelming feature advantage of Windows 8, but many PCs just did not have touch-screen capabilities. You'd go into stores and check them out and the ones that would be there would be too expensive. Even now, there just isn't enough capacity on the part of touch-screen manufacturers to make enough touch screens."

Possibly, some of those touch-screen costs will be coming down in the near future. A report by DigiTimes suggests that touch-screen costs will decrease at least 10 percent in conjunction with Microsoft's OEM license discount.

Can't Blame the Economy
IDC recently reported poor results for the global PC market overall, with an 8.3 percent decrease in shipments in Q4 2012, compared year over year. Could the current ongoing slump in the economy be a factor contributing to slow Windows 8 device sales? The economy is part of it, but it isn't the main reason, according to Chou.

"If you look back through 2008, 2009 and 2010, there actually was a good amount of PC volume growth worldwide," Chou said. "And, of course back then, we were pretty much back in the throes of the recession. A few things accounted for that. One was prices were dropping very rapidly back then. There were things like netbooks that helped to lower prices overall. And one bad legacy of that is that it permanently lowered people's expectations about how much a computer should cost."

Businesses are perhaps the exception. While they used to defer their PC refresh cycles to once every three or four years, that time period is being extended in this bad economy, according to Chou.

Another contributing factor slowing shipments is that tablets have "cannibalized" the PC market. People who buy tablets have just deferred on upgrading their PCs, Chou explained. And while many might expect Microsoft's Windows 8 launch to have boosted computer sales, especially during the December holiday season, IDC wasn't surprised when that didn't happen.

"It's not a huge surprise for us because we had actually predicted that it would be a very tough holiday quarter," Chou said. "Windows 8 arguably only took up two thirds of the quarter. And traditionally, we don't see a new operating system as being an overwhelming factor in driving in shipments, at least in the first quarter of its release. And then, on top of that, there were many mixed reviews of Windows 8 prior to its launch."

Microsoft took the initiative to produce its own PC hardware with Windows 8, which seemed to come as a shock to some of its OEM partners. Microsoft released its own "tablet/PC" devices -- namely, the "Surface Pro" (running Windows 8 on x86 hardware) and "Surface RT" (running Windows RT on ARM hardware). Microsoft's argument for doing so was it would show its hardware partners what was possible to do with Windows 8, including how to compete with Apple.

But really, the most important factor was always cost, according to Chou.

"Over the course of the recession, we've seen prices of computers drop significantly," Chou said. "People are accustomed to buying computers in the $500 to $600 range. That's pretty hard to do right now if you want to have a compelling Windows 8 computer that is thin enough, powerful enough, with good storage, and has touch. So I think Microsoft, while they have their frustrations [with OEMs], they are not in the shoes of these PC manufacturers who actually have to source and assemble all of this hardware and still try to make some margins."

Some OEMs might not go along for the full ride. For instance, Samsung has given signals that it won't build Windows RT devices in the U.S. market, nor in Germany.

About the Author

Kurt Mackie is senior news producer for 1105 Media's Converge360 group.


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