Two words and a link: Price Discrimination. Wikipedia doesn't do a terribly great job of explaining what exactly price discrimination is, so I'm going to give you my own brief version.

The Demand Curve

For typical markets with elastic demand* curves, consumers as a whole will determine that at price P they will, as a whole, purchase quantity Q of product. If we map that out we get the following graph:

*Elastic in this context means that consumers have a choice. Insulin to a diabetic is a very inelastic good since they'll be willing to pay almost anything for it.

The total revenue by this firm is P*Q, or the cost of each good times the number of items sold. It should be noted that the entire area under the curve is the total possible revenue. Companies notice this when their customers say, "Boy your product is cheap!" or, "I really wish I could justify spending X because then I would buy 10 of them!" The companies account then go back to their excel spreadsheets and figure out how they can make both happy and make more money. They end up with this:

Again, their profit is dictated by the area underneath the demand curve that they're covering. Notice that the area when selling at two different price points is greater than when they are selling at a single price point! This is what's called Price Discrimination: appealing to multiple segments of the demand curve based on perceived wants and how much they'll pay to achieve those wants in order to maximize revenue.

For the Calculus Loving Folks

People who did well in Calculus will immediately notice that an integral "solves" this problem. These people will say, "Hey, why don't we just chop up that demand curve into infinitesimally small chunks and we'll maximize revenue!" They're right of course, but practically it's either too confusing for the consumer, the producer or both.

In software, there have been a few ideas to integrate the integrals* by using ideas such as subscriptions and pay-for-features. Subscriptions have kind-of, sort-of worked, while the pay-for-feature model has never really taken off.

*I apologize.

Applications to Windows 7

So now it should be clear why Microsoft has six different versions of Windows 7. I'll attempt to break them down to make it clear which aspect of the demand curve that Microsoft is applying too:

• Starter Edition – Super cheap, emerging markets
• Home Basic – Cheap, emerging markets
• Home Premium – Alright, worldwide. This is the brunt of first world consumers.
• Professional – A tad expensive, worldwide. Aspiring geeks and companies who don't have contracts with Microsoft.
• Ultimate – Expensive, worldwide. True geeks, professionals who need everything.
• Enterprise - $Bling$, worldwide. Geeks who do geek things for a living. Companies who have 1,000+ computers.

If Microsoft were to simply sell a single version of Windows 7 for, say, $150 then it would be missing out on a lot of area under the curve. That's a lot of money to throw away when Windows is currently selling 15 billion dollars worth of product every year.

The Solution and Way Forward

The biggest complaint about Microsoft price discrimination practices is that it's confusing. Clearly Microsoft isn't going to consolidate to a single version so what is the fix? It's simple and something Microsoft has trouble with: clear, honest, open communication. Consumers hate to be surprised when they discover that they don't have XYZ feature that they need. Partly we fail because we depend on our OEMs to help us. Dell, HP, Lenovo and so forth have to do a good job allowing for this great communication to happen when consumers are purchasing their new laptops. Furthermore, we need to make distinctions that are meaningful and relevant to the average consumer. I do believe that Windows 7 is doing a bunch better job with their SKUs than they did in Windows Vista. It's quite simple:

If you're buying a new computer, get Windows 7 Home Premium unless your IT department tells you to get Windows 7 Professional.

I've had a couple of people come up and ask why they should be using the Windows 7 beta so I thought that I would list a few of the reasons that I've been giving.

1. New Taskbar 

The new taskbar has been written about extensively so I'm not sure there's reason or me to elaborate about it functionally. 

The great thing about the taskbar is what it allows Microsoft to do long term with the concept of windows, documents and applications. No longer do applications have to solely exist within their windowed environment, but now there's a great launching point for quick, common actions that users want their applications to perform. Additionally, I'm really excited to see the current MDI fad go the way of the platypus*. MDI implementations have been mostly driven in the browser sphere basically because Windows used to suck at managing a whole bunch of windows belonging to an application. Windows 7 fixes this and blurs the distinction between an MDI and SDI app to the point where "tabbed browsing" is no longer a feature people need.

* Within the software industry there seems to be these pendulums that keep swinging back and forth. We've seen three major swings of the distributed vs. centralized within the last ~50 years: the rise of the mainframe (centralized) which gave way to PCs (decentralized) to where we're at now which is Web 2.0 type of centralization. Eventually we'll get to a point where cloud computing is pervasive and we'll be decentralized again trying to get a bunch of devices working together nicely.

2. Window Management and Control

Windows 7 borrows from an idea that's been around for a while in MDI applications such as Visual Studio where you can "snap" certain display elements to the side of the interface. What this practically means is that if you drag Word to the left edge of the screen it "snaps" there and takes up half the screen. And if you were to drag Excel to the right edge it would snap there and take up the other half of the screen. And now you're super productive because you can see your Word report and your Excel spreadsheet at the same time without having to futz around with window sizes. That's awesome.

There are a couple of other nice improvements as well. Drag a window to the top and it maximizes. Sweet. If you use multi monitors you'll appreciate this: drag a maximized window from one monitor without having to un-maximize it and then drag it.

3. UAC Improvements

User Account Control was the controversial feature in Windows Vista. To put it plainly, they've made the Windows 7 UAC what Vista should have been. 95%+ of the complaints I got regarding UAC with Vista was that it constantly asked you if you were sure that you wanted to do an action that you initiated yourself. Examples of this might be changing the workgroup or various display settings.

Windows 7 has improved UAC to the point where it knows whether the user is initiating an action or some software piece is trying to initiate the action. By default UAC will only warn you of things that software is trying to do. This is a tremendous reduction of prompts and I'm sure the public will have a better reception to the smarter Windows 7 UAC.

4. Driver Support

No major subsystems have been rewritten for Windows 7 unlike Vista where several huge systems were redone and broke driver compatibility (video, audio, networking). This means that if your PC can run Windows Vista it can run Windows 7 for the most part. On the two machines I've installed Windows 7 on all drivers but one have been successfully installed. A quick trip to the Dell support site provided a driver for the last piece of hardware.

5. Improved Battery Life

I installed Windows 7 on my girlfriend's laptop and her battery life went from about five and a half hours to just under eight. That's a huge improvement for every laptop out there!

6. QAM with Media Center

QAM is a technology to deliver HD video over a standard cable connection provided by a service like Comcast or Time Warner. With the Windows 7 Media Center you can decode this and get picture perfect HD TV for free with a standard cable package and no set top box. Previously you would have to use something like Over the Air HD which had major pitfalls for people in downtown areas or in bad geographic areas. Grab yourself a cheap TV tuner and turn your computer into a Tivo.

7. It Works Better on the Same Hardware

Windows 7 performs equally or better than Vista in most cases on the same hardware. Netbook support for Windows 7 I'm told is a particularly compelling story. Ultimately the point is that you have almost no reason to fear the Windows 7 better on any hardware that runs Windows Vista. In some cases you'll find that it runs better than Vista ever did and that's a great success story. So really there's no excuse to not jump in.