By Jessica Hodgson
Of DOW JONES NEWSWIRES

SAN FRANCISCO — Microsoft Corp. (MSFT) said it would slash prices on the main consumer version of Windows 7, the new version of its operating system, and will defer up to $300 million of revenue this quarter due to a program designed to help consumers upgrade.

The world’s largest software company is under pressure to encourage customers to move rapidly to Windows 7, following a poor critical reception to its predecessor, Windows Vista, at a time of a challenging economy. Windows generates about 30% of the company’s $60 billion in annual revenues.

Using a similar approach to one adopted in the run-up to Windows Vista’s arrival, consumers and small businesses that buy new computers with Windows between Friday and Windows 7’s Oct. 22 release will get a free copy of the new operating system when it becomes available.

The program doesn’t include European countries where, due to antitrust challenges, Microsoft has decided to decouple its Internet Explorer browser from its operating system.

Accounting rules require such a transaction to result in some revenue being deferred during the program, which will end Jan. 31. 2010.

The deferred revenue projections Microsoft provided probably aren’t a reliable indicator of Windows 7 demand, as they account for a small portion of total expected sales.

Redmond, Wash.-based Microsoft said during an investor conference call Thursday that it is required to recognize sales under the upgrade program as two distinct products; a sale of Vista and a sale of Windows 7. Revenue recognition of products shipped to original equipment manufacturers: PC builders who bundle Windows with their products, can occur when the product is shipped to them. Revenue recognition for sales to consumers can’t occur until consumers take delivery.

Microsoft expects most of the revenue deferred in the fourth quarter of fiscal 2009, which ends June 30., 2009, to be recognized by the second quarter of fiscal 2010.

Microsoft also said it’s cutting the retail cost of its most popular Windows product, the Home Premium upgrade version, by around 10% in the U.S, though most other versions of the product are priced comparably with the most recent retail prices for Windows Vista.

When full copies of Windows 7 go on sale in October, Microsoft plans to charge $119 for Home Premium, $199 for Professional and $219 for Ultimate.

From Friday, Microsoft will also allow customers in the U.S., Canada and Japan to buy upgrade copies of Windows 7 Home Premium for a discounted price.

Credit Suisse analysts said in a research report last week they expect Microsoft to defer nearly $1.5 billion of revenue from the first quarter of fiscal 2010, starting July 1, to the one that begins Oct. 1. Thomas Weisel Partners, in a research note Thursday, said it believed the impact in the quarter would be “upwards of $1 billion.

It’s difficult to extrapolate what the deferred revenue figures suggest about overall demand for Windows 7. Deferred revenue projections provided by the company largely reflect retail sales, a relatively small portion of total Windows sales. Microsoft doesn’t disclose what percentage of Windows revenue comes from retail, but analysts say sales through original equipment manufacturers are the overwhelming majority.

One analyst said getting Windows 7 into the hands of consumers as smoothly as possible through retail would help fuel demand in the OEM channel.

Microsoft shares were recently up 27 cents, or 1.2%, at $23.75.

(Kevin Kingsbury contributed to this report.)

—By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com

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