Analysts pleased with Microsoft's Windows strategy
Shares of Microsoft Corp. fell more than 1 percent Friday, a day after the software giant announced price cuts will be offered as part of its impending release of a new version of Windows.
Microsoft said Thursday it will cut prices for the consumer version of Windows 7, scheduled for release in October -- a move that will have the company deferring some $300 million in revenue in its fiscal fourth quarter ending in June.
The price cut is seen as a positive step toward enticing users to upgrade to Windows 7 in broader numbers, following the relatively poor reception afforded to its predecessor, Vista.
Consumers who buy a personal computer between Friday and the official release of Windows 7 will receive a free upgrade to the new product, and prices for the Home Premium upgrade version of Windows will be cut by about 10 percent in the United States.
FBR Capital Markets analyst David Hilal told clients in a note Friday the Windows 7 pricing strategy should help prevent a "stalling" of personal-computer purchases during the back-to-school shopping season.
"The price breaks are a good strategic move," Hilal wrote, given that Microsoft may be feeling some competitive pressure from Apple Inc., open-source Linux operating systems, and even Google Inc.'s Android operating system.
While Microsoft's Windows is the dominant operating system used in increasingly popular and affordable netbook computers, Google's technology is expected to become available in a wide variety of netbooks in the future.
Citigroup analyst Brent Thill told clients Friday that because retail versions of Windows account for a relatively small portion of overall sales, the Windows 7 price cuts are unlikely to have much of an impact on Microsoft's finances.
"The million-dollar question," he wrote, is what Microsoft will do concerning pricing for versions of Windows 7 provided directly to PC makers -- a business that usually accounts for roughly 80 percent of revenue in the client division that includes Windows.
Thill suggested pricing for manufacturers should likely "be in line" with that offered under Vista. The analyst maintained a $28 price target for Microsoft shares.
Microsoft shares slipped 36 cents to $24.43 in afternoon trading Friday.
Cowen & Co. analyst Walter Pritchard wrote to clients Friday he expects a total of some $1.2 billion to be deferred as a result of the Windows 7 pricing and incentives strategy, with some $900 million of that deferred in the quarter ending in September.
While Microsoft will be giving up some portion of earnings in the current fiscal year as a result of the deferrals, the analysts wrote the company will be getting that money back alongside an expected recovery in the personal-computer market at the end of this year and into next year.
Pritchard wrote he expects a "bottoming" in the PC market in the second half of this year, followed by a resumption of growth.
(c) 2009, MarketWatch.com Inc.
Visit MarketWatch on the Web at www.marketwatch.com
Distributed by McClatchy-Tribune Information Services.