The average price that Microsoft ( MSFT ) charges PC manufacturers like Dell ( DELL ) and HP ( HPQ ) for its Windows operating system ( OS ) has been declining since 2008, led by an increasing mix of netbooks among PC Sales. A sharp increase in emerging markets demand also lifted demand for lower priced notebooks.
Microsoft sells a variety of Windows editions: Home Premium, Professional/ Business and Ultimate editions of Windows Vista and Windows 7, as well as tablet editions. Microsoft competes with Apple's ( AAPL ) Mac OS, which owns a small share of the PC operating system market.
We estimate that the average pricing declined from a high of $77 in 2007 following the release of Vista to around $60 in 2010.
While we currently forecast a gradual decline in average prices to around $60 in the coming years, Trefis members predict a slightly better scenario projecting the pricing to average around $58 over our forecast period. The member estimates imply a modest upside of around 3% to our price estimate for MSFT stock.
We currently have a Trefis price estimate of $30.67 for Microsoft's stock , about 21% above the current market price of $25.31.
Higher Mix of Netbooks in PC Sales
Netbooks, which are smaller versions of notebooks in terms of size, pricing and performance, are seeing rising sales over the past few years. Netbooks are a good option for consumers who are mainly looking for web browsing and who use light applications that don't require a lot of processing power.
Many PC makers are choosing Linux, an open source OS, for their netbooks since Linux is free. Microsoft is trying to counter this trend by introducing stripped down versions of Windows at cheaper prices. And we expect the increasing mix of netbooks will keep average Windows pricing down.
Demand Growth in Emerging Markets
The majority of PC growth in the coming years is expected to come from emerging countries like India, China and Brazil. Consumers in these markets are price-conscious and inclined to buy lower-priced computers.
In a competitive PC hardware pricing environment, Microsoft cannot afford to sell its Windows OS for high prices. As emerging markets form a bigger share of the PC market, Microsoft's overall OS average pricing should fall.
The Trefis community projects Windows pricing for PC makers to trend slightly above our estimates $60 to $58 in the coming years vs. our forecast of a decline to around $53. Higher average prices could come from increased sales of Windows 7 and companies replacing old PCs with new ones. (See Microsoft Rises on PC Refresh Cycle ). The member estimates imply a slight upside to the Trefis price estimate for Microsoft's stock.