CES Countdown #6: Can the PC adapt to the commodity business model?

Would you subscribe to Windows?

When Microsoft Chief Software Architect Ray Ozzie takes the stage to extol the virtues of "the cloud" -- that nebulous entity that may yet provide computing services to the masses, preferably with a not-so-cloudy Microsoft logo emblazoned across it -- he's effectively saying much the same thing that Bill Gates has said before, though perhaps with more flourish and enthusiasm than substance. Maybe if computing were sold to the consumer as a commodity, to which he subscribed or which he leased by the hour or the megabyte or the month, the seller would be able to maintain a more direct, binding pact with that consumer, and perhaps secure its stream of revenue for several years.

It isn't as if the commodity model isn't being done now on a large scale, almost everywhere else in electronics. Microsoft has been one of the model's more effective practitioners, not just with its business licensing for Windows Vista, but with its Xbox 360 game console. The Xbox Live service is obviously a subscription-based system, but the commodity model applies to gaming in a much deeper way: Manufacturers including Microsoft, Sony, and Nintendo can receive low margins, or even negative margins, for their respective consoles, knowing that consumers will spend more on games and accessories down the road. The entire success of the gaming business depends on this so-called "attach rate" -- the amount of extra stuff gamers are willing to buy.

So you'd think that the Nintendo Wii's lower number of game titles overall, compared to its competition, would work to its disadvantage; and that high sales of its console would actually work against it. Not at all, it turns out. Nintendo never actually used the most expensive components available from the very beginning of the Wii's run; so higher margins on its console, coupled with greater demand for specific game titles and a greater need for add-on accessories such as fake steering wheels and tennis rackets, have ended up benefitting Nintendo overwhelmingly.

Gamers are, in an indirect sense, game "subscribers" -- they consume their software, and more effort has been made in recent years to design games so that they can be fully consumed -- completed, finished, done -- to ensure gamers' need for more. Microsoft has experimented with ways to make PC software seem like it's expired -- the most obvious ploy being attaching the year to the name of the software, like Windows 95 and Office 2007. Other than that, Microsoft and others have been entirely unsuccessful in applying the lessons of the gaming industry to the PC industry.

The reason, most ironically of all, could be that Microsoft's greatest success of the 1990s -- making PCs appear dependent on Windows, so that consumers who buy one get the other -- is working against any effort to apply the commodity model. As AR Communications senior vice president, and frequent BetaNews contributor Carmi Levy put it, "Consumers won't pay for something they've been getting for free all along. And as far as the cost of Windows is concerned, the majority of buyers who get it pre-loaded on a laptop or desktop perceive that they're getting it for free, even though logically we all know that somewhere deep in the cost of that shiny new machine is a chunk of money for the operating system. "Consumers are already used to consistent PC price erosion, and they especially like that PCs come with no strings attached to date," Levy continued. "These days, they pay less for their laptop than they did just a couple of years ago, and they get to bring it home without any future subscription costs attached. It'll take a monumental selling job on the part of vendors to convince them that paying a monthly fee for something they've essentially gotten for free all along, represents good value. I doubt Microsoft or anyone else is in a position to pull it off, especially as the economy spirals downward and consumers look for any opportunity to shave the monthly budget."

But what if Microsoft were to completely reverse its historical position on Windows consumer licensing, and make the consumer fully responsible -- just over an extended period of time? Vendors and OEMs could pay nothing for pre-installing Windows, which could in turn drive down the up-front costs for PCs? Lower costs and low fees could make for some intriguing commercials, just so long as Jerry Seinfeld isn't the pitch man.

If it's a good idea, Microsoft has set up its own roadblock against implementing it, says Ross Rubin, NPD's director of consumer technology industry analysis. "It would still be in Microsoft's interest to get the licensing revenue up front from the OEMs," Rubin told BetaNews, "to which Microsoft markets that they can differentiate by optimizing for various Windows experiences -- mostly unsuccessfully in the case of Vista features such as SideShow. And while it is difficult to say what incentives may be occurring in the netbook market right now, the price gap between identically configured netbooks running Linux and Windows XP has been far below $100."

"Dropping the purchase price by $100 is no incentive for consumers who are already used to getting such incentives for free," Carmi Levy added. "They're wary of anything that locks them into additional monthly charges, and don't see the value proposition of such arrangements in the same manner as businesses do."

The subscription model has worked for software companies that are only recently introducing themselves to the world, and are making innovative and complete value propositions to discrete classes of customers, Levy reminded us. Salesforce.com is one example. But that's not a consumer business, and the very fact that Microsoft is such a heavyweight brand among consumers may encumber it from making an entirely new value proposition to consumers based on the commodity model.

That could be one reason why efforts to launch value-added services around the Windows Live and Office Live brands -- which up to now have been free -- have never actually gotten off the ground.

Enthusiasts have speculated about Google's desire to build out its Android smartphone operating environment into a complete Linux operating system for PCs, and a platform upon which Google could conceivably deploy utility-like services. The problem with that theory, Levy points out -- which impacts Google just as much as it does Microsoft -- is the fact that the very nature of the operating system's apparent seamless integration with the PC in consumers' eyes, makes the OS less relevant to their experience with the hardware than the hardware itself. So selling the software on its own value proposition -- Windows or Android -- becomes harder.

That's not to say Android couldn't be a platform for something else, Levy believes: "Google's two-tier services model sets an example by grabbing customers with well-featured, advertising-supported free offerings, then moving them and businesses into even more full-featured, enterprise-friendly subscription-based tools. They're not selling the OS -- which they currently lack but may yet introduce on their own -- as much as the experience of using their applications. When this same experience is just as easy to access from a non-Windows environment, the value proposition for Windows-based devices drops still further. As the world shifts toward doing more substantive work on the Web, Microsoft finds itself in a tenuous position of convincing consumers that using Windows as a starting point is differentially better than Mac OS, Linux, or any other OS, and is worth paying a little extra for."

Next: Could PCs become subsidized like smartphones?