Microsoft gambles that "Starter" edition dissatisfaction will boost revenues

The sudden popularity of netbooks caught Microsoft off-guard. Vista's bloated system requirements forced the company to dust off Windows XP and offer that older, cheaper OS to OEMs looking to a Windows-based netbook solution. Microsoft is now gambling that making a cut-down, crippled "Starter"  edition Windows 7 for low-cost systems, combined with an easy (but paid for) "Anytime Upgrade" will help boost flagging revenues. Personally, I think that it's a gamble - a dangerous gamble.

Bloomberg has some background:

"The challenge for us clearly is to get the average selling price up," Microsoft Chief Financial Officer Chris Liddell said last week. "We see Windows 7 at as an opportunity. We’ll have the ability for people to trade up, which would give us a price more similar to what we would normally get for a consumer."

To push customers to pricier versions of Windows 7, Microsoft is limiting the features of the cheaper edition. The most basic, called Starter Edition, can only run three programs at a time.

Microsoft will make it easy for consumers to quickly upgrade to more advanced versions, as all the required software will already be installed on the machine and it just takes a few minutes to switch from one version to the next, said Parri Munsell, a director at Microsoft’s Windows business.

Come the release of Windows 7 OEMs will be able to offer their customers the OS in four flavors - Starter, Home Premium, Professional (equivalent to Vista's Business edition) and Ultimate. The cheapest of these flavors will be Starter and this is being touted by Microsoft as the best OS for low-cost systems. Problem with Starter is that is has one serious limitation - you can only run a maximum of three applications at any one time.

Continued -->

Now, I like Windows 7. A lot. I think that it's the best OS to come out of Redmond in a long time. Windows 7 certainly feels as good as, if not better than Windows 2000, and could turn out to rival my current all-time favorite OS, NT 4. But I worry about the effect that unleashing a functionally crippled OS on the low-cost PC and netbook markets might do to the image of the OS. Current netbooks such as Samsung's fantastic NC10 are very capable machines. I've loaded Windows 7 Ultimate onto several of these machines, along with a whole raft of apps, and have no problems using them as desktop replacements. Sure, I'm not going to be gaming on them, doing a bit of Photoshopping or rendering my favorite videos, but for normal day to day applications, these systems are great. They're so good that the idea of crippling them with as OS that can only run three applications at any time is a crazy waste of resources.

Now, I understand Microsoft's need to be able to make use of pricing strategies, but a three applications limit seems far too severe. In fact, it goes against what an OS is supposed to do, which is facilitate the running of applications. Placing an arbitrary limit on the number of third-party applications that a user can run feels to me only a few steps away from having to pay Microsoft a fee for every application installed or run.

Let's also consider for a moment what an application is. Microsoft has already said that antivirus software won't count when it comes to the three-app limit, but what about firewall software? What about that app in your system tray that checks for new email messages on Gmail? What about all the other crap that wants in on your PC? Where is this "application" line being drawn? If I'm baffled, you can be darn sure that end users will be too.

Continued -->

This arbitrary limit also raises the issue that dreaded "M" word - monopoly. A free market usually means that when a company places arbitrary limits on what a product or service can offer the end user, competition from other vendors normally shapes things so that the customer can still find a deal that suits them. Microsoft can confidently place an arbitrary three-app limit on the cheapest edition of Windows confident in the knowledge that it has no competition. This is a path that Microsoft needs to be careful walking down.

Microsoft's in a tough spot. Developing an OS is an expensive business, and the company is having to find ways to hold on to revenues in the face of hardware that's constantly becoming cheaper and more powerful. The OS is increasingly becoming the single most expensive component of low-cost and budget systems. After last quarter's dramatic 8% drop in revenue it's clear that Microsoft needs to do something to keep the pennies flowing it. But selling a crippled OS in the hope that people will fork over cash in order to be able to run more applications has a desperate cash grab feel to it. In fact, as far as consumers go (business and enterprise users have more demanding needs for a desktop OS), this three-app limit seems to suggest that Microsoft knows that users don't care about Aero and all the bells and whistles that come with an OS, all they value is its ability to work as a platform and run applications. This leaves Microsoft in a tough position asking for more money for a version of Windows that has Aero or a backup too and leaves the Redmond giant having to charge a premium for running more than three applications concurrently.

Under a better financial climate I wouldn't expect this to be much of an issue since pricing wouldn't be as competitive as it is now, and OEMs would be more willing to absorb some of the price difference between Starter and Home Premium. As things stand right now I really don't see there being much wriggle room when it comes to price. End users are going to want cheap, and both Microsoft and the OEMs will want a good take from the selling price. This is likely to mean more Starter edition netbooks (and perhaps low cost notebooks) than we might have seen if the economy hadn't tanked they way it has.

Bottom line: If I had to choose between living with Starter edition limitations on my netbook or paying for an upgrade to Home Premium (I'm assuming will cost somewhere in the mid to high double digits region), a Linux distro such as Ubuntu at that point is starting to sound appealing.

Thoughts?

<< Home >>