My blogging colleague Robin Harris on Storage Bits poses an interesting question "How should Microsoft respond to very-low-cost Linux systems?" Here's how - by trying to make cheap systems irrelevant.
That's easier than you think you know. You see, take a look at either Vista or Leopard (it doesn't matter which) and what do you see? That's right, a rich, media intensive platform that's stuffed full of eye candy. It's no accident that both Microsoft and Apple are embracing media and eye-candy with enthusiasm - this is a very deliberate business choice that both companies have made.
Not only does embracing media give both companies an additional revenue stream, but at the same time it attempts to make low-end systems that can't handle all the glitz and glamor obsolete. If your system can't handle hi-def and never-ending eye-candy, it must have been made during the stone age and needs replacing. As these very-low-cost systems attract more attention, I expect both companies to be more aggressive in promoting higher-end systems over cheap systems.
I'm not sure how long Microsoft and Apple can continue to pull off this illusion, I guess it depends on how consumers view eye candy - if it's an important part of the user experience then cheap, low-end systems become marginalized, if not, these systems have a chance of flourishing. My guess is that Windows/Mac based PCs have dropped in price so much over the past few years that price isn't as relevant as it was a few years ago and in some ways Linux might have missed the party.