Slower Windows Pricing Decline to Benefit Microsoft
Slower than expected decline in Windows pricing for PC makers could create an upside of around 4% for Microsoft’s (NASDAQ:MSFT) stock. Windows pricing for PC makers refers to the average price that Microsoft charges for its Windows Operating System to PC manufacturers like HP (NYSE:HPQ) and Dell (NASDAQ:DELL). We estimate that Windows pricing has declined from around $77 in 2007 to close to $60 in 2009 [1], and we expect the trend to continue, though at a slower rate.
Microsoft competes with Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) in the operating system market. We estimate that Windows operating system accounts for around 40% of the $28 Trefis price estimate for Microsoft’s stock (current market price is $25).
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Windows Pricing for PC Makers increased from 2005 to 2007 due to an increasing mix of premium Windows editions that sell for higher prices. Premium editions accounted for about 60% of the mix in 2006 compared to 69% in 2008. In addition, 2007 saw high demand for Windows Vista.
The average of forecasts for Windows Pricing for PC Makers created by Trefis members indicates a projected decrease from $62 in 2010 to $57 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from around $57 in 2010 to $51 by the end of the Trefis forecast period.
We believe Windows Pricing for PC Makers will decline gradually over the forecast period due to a shift from premium Windows to lower-priced versions driven by higher demand in emerging markets and demand for lower priced editions for netbooks.
You can drag the forecast trend-line above to express your own view, and see the sensitivity of Microsoft’s stock to Windows Pricing for PC Makers.
Our complete analysis for Microsoft’s stock is here.
Note:
1. Calculated based on calendarized Windows OEM Revenues and Windows OEM Licenses Sold. Microsoft reports Windows OEM Revenues in its SEC filings. Windows OEM Licenses Sold is calculated based on our estimates for Microsoft’s market share of PCs.