"There is a real cannibalization risk on the upside product," said Bill Hilf, general manager of Windows server marketing and platform strategy at Microsoft. "But you have to believe that the overall growth of the pie, if you expand the pie, that it outweighs the cannibalization risk."

Announced earlier this month, Windows Server 2008 Foundation is aimed at small businesses without dedicated IT staff or an elaborate computing infrastructure. The product, which will ship on inexpensive servers made by Dell, Hewlett-Packard, and others, is meant to help businesses take advantage of server-based applications such as running their own e-mail system or business software.

In some markets, these servers will cost between $500 to $700. "We've been pretty aggressive with the OEMs (original equipment manufacturers), telling them we want to drive this pretty darn low," Hilf said.

That price means Windows Server 2008 Foundation's capabilities are limited compared to other versions. For example, it doesn't include Microsoft's Hyper-V virtualization technology and the server hardware is limited to a single CPU and no more than 8GB of memory. But Microsoft believes that's enough power for users with basic server needs. For users who want more, the company would rather have them upgrade or buy servers based on the more powerful, and more expensive, Windows Server 2008 Standard Edition version of the OS.

"You can do an in-place upgrade to Standard Edition," Hilf said.

In some ways, the release of Windows Server 2008 Foundation is a reaction to the success of hardware makers in driving down the cost of computers, including low-end servers. "They were driving prices down and it eventually broke the pricing model," Hilf said. "We sell the software for $1,000 and these guys were selling the hardware for $300. It was silly."

The development of Foundation Edition spurred a vigorous debate within Microsoft over issues such as pricing and upgradability.

"People who actually hold [sales] quota started coming back to me, asking, 'Wait a minute, how is this going to affect my Standard Edition business?'" Hilf said. "Some geographies were fully onboard and some were nervous."