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Bloomberg: Microsoft slashes Windows price

  • Microsoft (MSFT) is cutting the price of Windows 8.1 by 70% for manufacturers of low-cost computers and tablets so that they can better compete against Google's Chromebooks and other low-cost rivals, Bloomberg reports.
  • For devices that retail for under $250, Windows will cost $15 instead of $50.
  • Microsoft's action comes after it said earlier this month that it sold over 200M Windows 8 licenses since the product's launch in October 2012. That's a slower rate than for Windows 7.
Comments (29)
  • MJDD
    , contributor
    Comments (65) | Send Message
     
    Microsoft's equivalent of Intel's "contra-revenue". Between the two, this could make a dent in the tablet market. This helps explain why Intel predicts having CPUs in 40 million tablets, this year.
    23 Feb, 06:39 AM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    In other news, Google Chromebooks accounted for ~0.2% of web traffic in North America last month according to Chitika; long, long way to go to relevancy for Chromebooks...
    23 Feb, 10:02 AM Reply Like
  • IncomeYield
    , contributor
    Comments (1689) | Send Message
     
    Yes, strange. On the surface (no pun intended), the Chromebook looks appealing, but side-by-side with an inexpensive Windows laptop, not so much.

     

    A race to zero which Google can survive but a problem for Microsoft and eventually Apple.
    23 Feb, 12:49 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    TRANSCRIPT

     

    The real relevancy is some one inside MSFT has blinked and now the profit curve goes south. if the rumor of Ford dropping MSFT for blackberry it becomes a perception problem
    23 Feb, 05:14 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    NYC,

     

    Care to put some numbers on your "profit curve goes south" estimate? I only ask for that because I played this game before with the "PC is Dead" people - and three years after the iPad was released, the number of units shipped globally is unchanged (translation - they were wrong).

     

    Let's get to the numbers: what impact do you think this will have on the Windows division in the next 3-5 years? As a starting point for your reference, the division made $9.5 billion in operating income last year.

     

    Do you think this division will be making $7 billion or less for Microsoft 3-5 years from now? $5 billion? $0? I would be interested in hearing your thoughts on what someone blinking means for the bottom line.
    24 Feb, 08:38 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript

     

    You need to step back from the numbers for a moment. Look at what the original pricing was or 100 now the price is 30. As your
    margin goes down per item your breakeven point might require
    a tripling of sales or more. True should the lower priced computers
    increase sales the division will be more profitable year over year.
    Many companies are viewed by the profits they put on the board rather than what they could have put up if there processes were tightened up.
    According to various articles win 8 is behind in the numbers to win 7 as to initial sales. Assuming that is correct if win 8 had never happened how much more profit would MSFT have by erasing the cost of win 8. Now we always need to advance software however maybe the optimum point is ever 5 years so its much more advanced than a simple upgrade.
    24 Feb, 10:50 AM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    "You need to step back from the numbers for a moment. Look at what the original pricing was or 100 now the price is 30. As your
    margin goes down per item your breakeven point might require
    a tripling of sales or more."

     

    When was the original pricing $100? Would you please provide a source for that statement (if you have one). To counter your (as of now) unsubstantiated $100 price point, here's a quote from Microsoft exec Charles Songhurst in 2009:

     

    "If you think of the $1,000 PC, which has kind of been the benchmark for the last decade or so, then we've always charged about $50 for the copy of Windows for that PC."

     

    The last few years of EBIT margin for the Windows division include a lot of noise, namely the inclusion of Surface and outsized ad spend (though the overall trend has been down over a longer period of time). For example, we know from the disclosures in the 10-K that Surface alone was a direct impact to profits (~$700 million for Windows division); this does not include a 34% increase - or $1B - in ad spend, much of which was tied to Surface.

     

    If you attempt to back that out for a pure Windows licensing metric (which we're talking about), operating income easily exceeded $10 billion. That compares to $10B six years ago, a bottom of $9.5B in FY2009, and a peak at $12B in 2010.

     

    From $12B to $10.5B is a decline of 12.5% - hardly the death spiral that one might expect. You're saying the profit curve will go south in the future; is this the type of decline you're expecting? A 20% decline over the next 3-5 years off the normalized number I presented gets us to operating income for Windows of ~$8B. Compare that to the numbers I offered ($7B, $5B, $0). Are these the numbers you want to step back and look at? If not, present those that you would rather address.

     

    Considering that the Windows division only accounted for 27% of Microsoft's overall operating profits in FY13, this works out to an overall headwind to the bottom line of ~3%.

     

    As an owner, I'm worried about the big picture at Microsoft; with operating profits ~40% in FY13 than in FY09, despite the headwind from Surface (or Windows division as a whole), that tells you just how strong other parts of the business have been (with S&T operating income up 175% in the last seven years, and MBD up 70%).
    24 Feb, 11:39 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript

     

    I've owned Msft from nearly day 1. I was talking economics which is what I was referring to. Did you see a dollar sign before the number 100? It referred to 100% of the price which MSFT lowered by 70% meaning the new price is 30% of original pricing. If their margin is 40% of the original price on x units then they need to increase the units sold to 4x to match original profit. If they don't
    "profit curve goes south". If they reach 5x its new money in the bank.
    Like I said step back from the numbers they post and think what numbers they COULD post.
    24 Feb, 12:09 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    "Did you see a dollar sign before the number 100?"

     

    Nope, no dollar sign, percentage symbol, nothing; usually when people say "now the price is" and the next figure is a number, they're referring to dollars...

     

    "If their margin is 40% of the original price on x units then they need to increase the units sold to 4x to match original profit."

     

    I sell something and make $10 in operating profit; now I make $4 - 40% of the original. To make the same amount, I need to sell 2.5 units (2.5 * 4 = $10), not 4X the number of units.

     

    Also, that assumes that the margin for ALL UNITS fall; in Microsoft's case, we're only talking about units that retail for under $250 - a relatively small slice of the overall pie. Your math is flawed.
    24 Feb, 12:45 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript
    in your math you forgot the percentage of the price reduction
    if the soft ware price was $10 for say 1,000,000 units derive a 400,000 (40%)profit your cost is 600,000
    you now lower your price to $3.00(70% reduction)
    for your first 1,000,000 unit you lost $300,000 now assume you could cut production cost by 50% (highly unlikely)
    your second 1,000,000 still keeps you at a 300,000 loss as your second 1 million units cost 300,000 and you received 300,000.
    or zero p+l .
    never look at profit as they sometime never appear
    look at production cost.
    24 Feb, 01:11 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript
    do to my bad typing add an addition zero to the figures.
    24 Feb, 01:20 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    NYC,

     

    Again, you're assuming this applies to the overall base; the reality is that the revenues derived on the vast majority of Windows PC's sold are unaffected by this change.

     

    The sub-$250 space is essentially an untapped market for Windows (Best Buy's website does not list ANY new Windows laptops/desktops for under $250; from my search, the same is true for Dell and HP), and is relatively new for Windows tablets. I can't find any data, but I think the math suggests the sub $300 segment is

     

    You're actually making a pretty strong case for margin expansion, in my opinion - the incremental margins on these $15 licenses will likely be north of 80%, right? That compares to current operating margins in the Windows division of ~50%. Do you agree with that, or do you think I'm missing something?
    24 Feb, 02:38 PM Reply Like
  • wil3714
    , contributor
    Comments (1915) | Send Message
     
    How much does it cost to burn a CD?
    24 Feb, 03:12 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript

     

    In the short term no, in the long term yes for margin expansion.
    there's an old joke about economics I have a 5 million dollar factory
    and make a million units at capacity or my cost is $ 5 a unit
    Should I make 1,000,001 what is the cost of that one unit above 1 million.

     

    answer: $5million I had to build a new factory.

     

    It's not that simple but you get the direction I'm thinking.
    I trade 40% of the time in my Roths so every trade is without tax consequences. If I trade in an IRA, I need to post a 25% gain
    just to pay the taxes because your taxed on dollar value not trade value.
    24 Feb, 03:17 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    "In the short term no, in the long term yes for margin expansion."

     

    I'm all about the long term; glad to see we agree on something :)
    24 Feb, 03:22 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript
    as to your question of $15 licenses I expect your right however
    not knowing the true cost of the license I have no clue.
    We both could be dead wrong if say the sales capacity is 3 million units and the production cost break even is 3.4 million.
    You might look at how the auto industry says we need 12 million units to brake even. Some years they have 10 mil units and have to play with line production and some years they make 16 mil or more units and everybody makes money.
    24 Feb, 03:30 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcripts

     

    I assume you are in the 20's-40'S range of age. The best and worst ages to invest. The best is you have a long term approach and goal.
    the worst is your trying to establish yourself and may be have a budding family or you might have parents you need to help. That's what I had to face. Now we are an empty nest couple who trade for a hobby and build a nest egg for the gran kids.
    My view of trading from age 30 till today has done a 180 degree swing. Back then I traded for a goal. Today with luck I trade for amusement.

     

    Note I still haven't played with the Del tablet, My friend is on a trip
    so I await his return.
    24 Feb, 03:51 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    Good guess - I'm in that range; that is part of the reason I'm a long term investor, but certainly not the main reason. It is the only approach that I believe is sensible and where I can be consistently successful; it works for me.

     

    Excited to hear the tablet review.
    24 Feb, 03:53 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    wil3714

     

    what's the real hourly rate of the employee and how many can he burn in an hour.
    24 Feb, 03:55 PM Reply Like
  • wil3714
    , contributor
    Comments (1915) | Send Message
     
    automate it
    24 Feb, 04:07 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    wil3714
    I'm glad you mentioned it, however in economics your
    cost comes down to the employee to run the system and the number of units produced by the system.
    So if we assume the real hourly is $10 and he does 10000 units an hour
    your cost is .001 per cd plus cost of plastic
    any questions?
    24 Feb, 04:21 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    transcript

     

    "it works for me" That the best line I hear, It means your comfortable with your decisions. When I explain trading to people
    I always explain you need to know you own risk tolerances. The next think I teach is the tax consequences by the account registration.By that I mean you can trade in an Ira, Roth, Jt ten and different trust accounts and have very different tax consequences. Before 55 a Roth and IRA are basically the same
    After 60 You get screwed by taxes in an Ira while the Roth is money from heaven as an example.
    24 Feb, 04:35 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    Very true - good words NYC
    24 Feb, 04:46 PM Reply Like
  • wil3714
    , contributor
    Comments (1915) | Send Message
     
    Let me give you a lesson on cost cutting using technology. All venders need to do is get shipped one CD with W8 and load it onto a computer. You can have CD keys for W8 licenses emailed to you and load software over a network to install on all the computers you want. You dont even need a CD, just the CD key. How about that for cost cutting.

     

    So in all, all MS has to do is generate a CD key to collect $15.
    24 Feb, 06:46 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    wil3714
    You sound like a MBA all full of himself.
    Another lesson for you
    your question was "How much does it cost to burn a CD? "
    you didn't ask could it be automated or how much does it cost
    to setup an internet system for checking and issuing the software. You might ask how much it would cost to monitor the system so that when a computer crashes you have to issue another software download. Learn to ask the right questions so someone can give you the right answer.
    Back in the 81 when I was a yuppie (definition one who was under 40 and paid over 40k) we did everything to learn from others.
    We looked for mentors. if at 45 your not making 500k then your not making the equivalent what I made 22 years ago.
    24 Feb, 07:16 PM Reply Like
  • wil3714
    , contributor
    Comments (1915) | Send Message
     
    You have to assume that MS has automated the process to the point where they'll sell pieces of plastic for billions of dollars. Your not paying hourly employees when you can dl the software and email the key.

     

    The point is the cost isnt fixed per item sold/produced. Your making a big deal out of nothing, you can even lower the cost even more than just emailing CD keys.

     

    Its not about how much you make but how you manage your money.
    24 Feb, 08:39 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2417) | Send Message
     
    wil3714
    you don't seem to get it. we were talking economics not finance.

     

    finance people are like you cost cut and automate(not unreasonable) until the economist ask if you get rid of all the workers who is going to buy your products.

     

    Going back to the 1980's a study was made in the banking industry that said normal automation would cause a lose of 3-5% jobs every year unless
    you increased your customer or transaction base. In NYC you might say has two home grown banks JP Morgan Chase and Citibank NA
    at this moment they do a thousand times more transactions and
    use less than a 1/3 of the old workforce.

     

    is that good or bad for the country, I don't think so but time will tell
    24 Feb, 09:19 PM Reply Like
  • Yokyok
    , contributor
    Comments (329) | Send Message
     
    What an amazing ship of idiots. If they'd simply listened, and given users a 'boot-to-desktop' option at the launch of Windows 8, this probably wouldn't have become necessary.
    23 Feb, 01:43 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (742) | Send Message
     
    You can boot to desktop with 8.1; the update was released more than four months ago.
    24 Feb, 04:15 PM Reply Like
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