Microsoft's holds Netbook ground - at a cost

I've been predicting that the Netbook would be very bad news for Microsoft. So what should one make of this story ...

Microsoft: 96% Of Netbooks Run Windows -- InformationWeek:

'It's hard to believe it's been a year since we first started to see netbook PCs running Windows come to market,' said Brandon LeBlanc, Microsoft's in-house Windows blogger, in a post Friday.

Citing figures from market research firm NPD, LeBlanc said Windows' share of the U.S. netbook market has ballooned from less than 10% in the first half of 2008 to 96% as of February. 'The growth of Windows on netbook PCs over the last year has been phenomenal,' wrote LeBlanc. NPD defines netbooks as devices that feature a screen that is 10.2 inches or smaller and sell for less than $500."

Should I admit defeat?

Hah! The key is the $500 pricepoint (BTW, the NYT claims the penetration is closer to 80% for XP). The NYTimes tells us that Microsoft is now charging $25 for XP, or about 5% of the unit cost (vs $73 for Vista). For that amount XP is a bargain, and it makes sense that Microsoft would take the market.

$500 is not the price point where things get interesting. That price point is $150 and below, at which point a $25 OS would be 16% of the unit cost.

Microsoft can still compete, by lowering the cost of XP or Windows 7 Lite to $15 a copy or less. The problem is they won't be making much money that far down, so they're going to have to build other companion businesses even as they pretty much give away their OS.

Not good news for revenues, but things could get nastier if the truly low end machines can't run XP or Windows 7 ...

Thin and Inexpensive Netbooks Affect PC Industry - NYTimes.com

The industry is buzzing this week about these devices at a telecommunications conference in Las Vegas, and consumers will see the first machines on shelves as early as June, probably from the netbook pioneers Acer and Asustek.

“The era of a perfect Internet computer for $99 is coming this year,” said Jen-Hsun Huang, the chief executive of Nvidia, a maker of PC graphics chips that is trying to adapt to the new technological order. “The primary computer that we know of today is the basic PC, and it’s dying to be reinvented.”...

... “A broad shift in the consumer market toward low-cost PCs would clearly put pressure on the revenues of nearly every player in the value chain, from component suppliers to retailers,” wrote A. M. Sacconaghi, a securities analyst with Sanford C. Bernstein & Company, in a report last month. “However, we believe the impact would be especially negative for Intel and Microsoft, who today enjoy near monopoly positions in their respective markets.”

... Some of the devices feel more like toys or overgrown phones than full-featured computers. Still, they are the big success story in the PC industry, with sales predicted to double this year, even as overall PC sales fall 12 percent, according to the research firm Gartner. By the end of 2009, netbooks could account for close to 10 percent of the PC market, an astonishing rise in a short span.

Netbooks have trouble running demanding software like games and photo-editing programs. They cater instead to people who spend most of their time dealing with online services and want a cheap, light device they can use on the go. Most of the netbooks sold today run on an Intel chip called Atom, which is a lower-cost, lower-power version of the company’s standard laptop chips. And about 80 percent of netbooks run Windows XP, the older version of Microsoft’s flagship software.

The new breed of netbooks, built on cellphone innards, threatens to disrupt that oligopoly.

Based on an architecture called ARM, from ARM Holdings in Britain, cellphone chips consume far less power than Atom chips, and they combine many functions onto a single piece of silicon. At around $20, they cost computer makers less than an Atom chip with its associated components.

But the ARM chips come with a severe trade-off — they cannot run the major versions of Windows or its popular complementary software.

Netbook makers have turned to Linux, an open-source operating system that costs $3 instead of the $25 that Microsoft typically charges for Windows XP. They are also exploring the possibility of using the Android operating system from Google, originally designed for cellphones....

... Mr. Burchers said a number of companies already making netbooks would show a new round of machines using cellphone chips at the Computex trade show in Taipei, Taiwan, this June.

Qualcomm, the San Diego company that built an empire on chips for cellphones, recently introduced Snapdragon, a chip created for smartphones and ultralight computers. Already, the company has announced deals to sell the chip to 15 major device manufacturers, including LG, Acer, Samsung and Asustek. Qualcomm said some Snapdragon devices appearing this year would have screens of 10 to 12 inches.

.... In its last quarter, Microsoft posted the first sales decline in its history for the PC version of Windows. It blamed netbooks for the drop. On average, Microsoft charges computer makers $73 for Windows Vista, the version of Windows used in desktop and high-powered laptop PCs...

One caveat. When Mr. Huang talks about $99 Internet computers this year he's dissembling. He's referring to machines that cost $99 when purchases with a two year data services contract. In other words, they're real cost is $300 or so -- not yet revolutionary.

The revolution comes when the real price of the netbook hits $150. That will come when the GoogleBook powered by Android and pre-loaded with Google software is sold in a Target near you in 2010.

That's when Microsoft shareholders will really feel the Netbook pain.

Update 4/10/09: Interesting footnote - Microsoft protects their laptop market by restricting Netbooks using XP to only 1GB of memory.