Microsoft is cutting the price on its Vista between 20% and 40% from its price as of the beginning of this year. While most copies of Windows aren't sold via the retail channel, Microsoft is apparently hoping to reduce the disparity between hardware costs and its software. When you can buy a new PC for $400, it hardly makes sense to drop another $400 for an increasingly irrelevant operating system. (All operating systems, not just Windows, in terms of perceived customer value.)
But the bigger reason appears to be an effort to make Windows more appealing to emerging markets, as Mary Jo Foley notes, where customers should expect to see bigger price cuts than in more established markets.
This isn't really about the United States and Western Europe, in other words. It's a battle for the emerging markets which aren't droning after Microsoft just yet. Outside the saturated markets of the United States and Western Europe open source is a much bigger threat in the short term.