Microsoft Risks Being Stuck in the Middle of a Netbook Price War

Netbook vendors continue to debate whether these small wonders should be $300 gadgets or more full-featured $500-plus models. But Microsoft's profits may be vulnerable in either scenario, analysts say.

Netbook has become as trendy a word as "cloud" and analysts predict sales are will grow 65 percent this year from 2008's totals. But the netbook pricing game is getting complicated as OEMs try to simultaneously add features and keep prices down. The bad news for Microsoft? No matter whether the OEMs stick to $300 price points or push higher, Microsoft's overall profits are vulnerable, say industry analysts.

On one hand, Microsoft today is running Windows XP Home with Intel Atom chips very successfully on 90 percent of all netbooks, according to research firm The NPD Group.

Yet cheaper, Linux-based netbooks that plan to run on low-cost but efficient processors from ARM pose a steady threat to Microsoft, one that could increase if Google puts its smartphone OS, Android, on netbooks.

Further confusing matters: PC OEMs such as Asus, Dell, Hewlett-Packard and Samsung, can't seem to decide whether they want netbooks to have more features and cost more than $500 or be ultra-basic tiny laptops that cost less than $300.

Analyst Michael Cherry of independent research firm Directions on Microsoft says that netbooks will continue to be defined by price, not features. "Soon it will be hard to consider something over $500 to be a netbook," he says, adding that inexpensive netbooks offer the "greatest potential for Linux to grow with consumers."

Microsoft partner Hewlett-Packard may have just contributed to that Linux growth. This week, the Wall Street Journal reported that HP is considering running Android on its netbooks. It is still unknown if HP will use ARM processors or Intel's lower-end Atom processors.

Microsoft could take a hit whether netbook prices move up or down, analysts say. If netbook OEMs load on features such as DVD drives and higher-resolution screens and start running pricier versions of Windows 7 (Microsoft has said it will run Windows 7 Ultimate on netbooks), the price points will carry over into the realm of regular laptops — a troubled market that Microsoft wants to protect from further bleeding.

Gartner reported in January that revenue from the sale of PCs dropped between 15 and 20 percent during the fourth quarter of 2008 as sales of cheaper netbooks forced OEMs to reduce laptop prices.

One recent development that could also cut into the market for higher-priced laptops and leave Microsoft vulnerable is the acceptance of netbooks in recession-weary enterprises, analysts say.

Inexpensive and lightweight netbooks provide enough computing power for positions such as account managers and traveling salespeople. Microsoft will still benefit from corporate netbooks, but not the way it would with the more profitable sales of traditional laptops.

Netbook OEMs HP, Acer and Asus have either launched or are preparing to launch enterprise model netbooks with increased battery life and higher resolution screens.

Veteran tech analyst Roger Kay says that a rise in netbook prices will likely come as OEMs adjust to run Windows 7. "It's unlikely that Home Premium will be sold at the same price as XP Home Basic is now selling for netbooks. So, if the OEMs beef up the specs on the products a little, they could end up running 7 Home Premium, and the whole bill of materials will rise."

Yet if netbook prices continue the other way and keep dropping, Microsoft falls victim to the thrifty combination of Linux and ARM, which has said that 10 ARM-based netbooks are likely to hit stores by the end of this year. Says analyst Cherry: "If the price gap between Windows and Linux-based netbooks widens, buyers may stop caring about the operating system."

ARM has been candid about its desire to have its processors run on Windows, but so far Microsoft has refused to comment on any plans to port Windows to ARM-based processors.

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