Modules and the next version of Windows

There is a growing consensus of opinion forming that Windows "Seven" will be "modular," the concept being that you buy the core OS first and then add to it individual "modules" with logically distinct units of functionality. There are two ways the OS could be modularized in such a fashion, the first being that it could be split into functional "roles," such as "music" or "movies" or "mail & chat." The other option, which is a bit more radical, would be to build on the "Windows Live" software that updates/replaces some of the OS components. For example, Vista's Windows Photo Gallery is replaceable with Windows Live Photo Gallery. The Live version is similar in concept, but includes greater online integration and features.

With both Windows Vista and Windows Server 2008, we can see the first few steps in this modular direction, albeit in different ways. Windows Server 2008 has as one of its major features the idea of "roles". Rather than installing everything and the kitchen sink, with 2008, you install the base OS and then choose one or more roles, such as Active Directory domain controller, Web Server, or Print Server, and the software components to support those tasks are installed accordingly.

This "roles" tack has resulted in the now infamous multiplicity of versions of Windows Vista. If you want Media Center, you need to get Home Premium; if you want hard drive encryption, you need to get Enterprise; if you want Aero Glass, you mustn't get Home Basic; if you want everything, you have go get Ultimate.

The differences in capabilities among Vista's versions are fairly arbitrary; there isn't actually anything particularly business-y about the full-system image-based backup, for example, but it's not found in either of the Home versions. This annoyance is mitigated somewhat by the fact that Vista also made it easy to change between versions. Unlike the days of XP Home and XP Professional, where reinstalling from scratch was the only way to switch between variants, Vista has Anytime Upgrade, which allows someone with, say, Home Basic to upgrade to Ultimate relatively seamlessly.

Why go modular?

There are a few motivations behind the modular approach that appears to be Windows' future. With Server 2008, the rationale is that by not installing unwanted services, there is less (potentially exploitable) code running on the server, and so the server is more secure. Similarly, by offering components as "Live" tools, there are fewer antitrust concerns (they're no longer bundled with the OS, so Microsoft can't be exploiting its desktop monopoly).

But the most compelling reason—for Microsoft, at least—is an economic one. For a corporation with business-critical Windows-only custom applications, Windows is worth more than it is to a home user who just does a bit of e-mail and web surfing. The home user isn't really depending on Windows. It may be what he's used to, but if push comes to shove, he could always try one of those fruity computers with the funny TV ads that seem to be so trendy. Many businesses, on the other hand, need to run custom applications; if they can't, they're not doing business, and the cost of redeveloping the applications is huge. The upshot of this is that a business would pay more for its copies of Windows than the home user would because the Windows licenses are more important to the business than to the home user.

With only a single version of Windows, however, everyone has to pay the same price. This means that the price has to be relatively low, because Microsoft doesn't want to scare off the home users to whom Windows is worth relatively little.

Unfortunately for Microsoft, this means that business users can get away paying less for Windows than it's actually worth to them. They need to pay only the cheap home user-friendly price, even though they'd be willing to pay more than that if they had to. To Microsoft, this represents lost revenue; "lost revenue" that arises from people buying things for less than the highest price they would be willing to pay is called by economists the "consumer surplus."

If each customer could be charged what they were willing to pay rather than an amount that's identical for every user then Microsoft would get more revenue. Normally, though, it's quite difficult for companies selling commodity products to adjust pricing in this manner. Companies don't negotiate a price with each customer; they (or "the market") set a single price that everyone pays, and they just have to hope that it's the price that will give them the best trade-off between units sold and revenue per unit.