Vista Ultimate May Put Millions More In Microsoft's Coffer

Although criticized by some users and pundits for their higher cost, the premium versions of Vista -- particularly Ultimate ($399 for full version, $259 for upgrade) but also Home Premium ($239/$159) -- could add hundreds of millions to Microsoft's bottom line this year.

"We believe upside to our 2007 client revenue estimate could come from a higher premium mix, and a bigger contribution of Vista Ultimate to the premium mix," said David Hilal, an analyst with Friedman, Billings, Ramsey and Co., in a research note to clients.

Hilal's optimism was due to Microsoft's revamped estimate of the Windows mix it expects to sell during the rest of fiscal 2007. In a conference call Thursday to announce second-quarter earnings, Microsoft CFO Chris Liddell revised the estimate of premium editions' share upward to 60% of all sales from an earlier forecast of 54%.

In fact, during the quarter that ended Dec. 31, the premium mix was at 67%, an increase of 18 percentage points over the year prior and eight points over the first quarter. The uptick, said Microsoft, came from a boost in purchases of Windows XP Media Center, which in turn was driven by the promise of free upgrades to Windows Vista Home Premium for Media Center users when Vista rolls out to consumers next week.

Vista's premium editions look like a good bet, said Hilal. "Due to the increasing demand for multimedia functionality, we believe that Ultimate could do better than our 1% OEM license mix expectation, as consumers that use their home PCs for both entertainment and business purposes will be attracted to the breadth of functions that Ultimate offers," he wrote in the research note.

For every 1% increase in Ultimate's share of the premium mix, Microsoft will gain $150 million in revenue, Hilal estimated. Likewise, for every point increase in Home Premium's share -- which he forecast as nine percent -- Microsoft gets an additional $50 million.

"Our thesis remains intact: we believe Microsoft is embarking on a multiyear, multiproduct cycle that will drive improved revenue growth and expanding margins," Hilal concluded in the note.

Windows Vista will be available Jan. 30 in four retail SKUs (stock-keeping unit): Home Basic, Home Premium, Business, and Ultimate. Full version prices range from $199 for Basic to $399 for Ultimate, while upgrade prices start at $99 for Basic and top out at $259 for Ultimate.