Windows 7 and netbooks: Separating fact from speculation

Windows 7 and netbooks: Separating fact from speculation

Summary: Is Microsoft going to take a revenue hit when it releases Windows 7 because of the changing mix of PCs in the market? That's the expectation of many company watchers, though I have to admit I'm not quite so sure. Here's why.

SHARE:

Is Microsoft going to take a revenue hit when it releases Windows 7 because of the changing mix of PCs in the market? That's the expectation of many company watchers, though I have to admit I'm not quite so sure. Here's why.

Even though Microsoft is trying to stir up excitement for Windows 7's prospects on new (and most likely more expensive) multi-touch-enabled PCs, there is more interest among users and industry watchers around the next release of Windows running on netbooks. Microsoft officials demonstrated a full-fledged version (we don't know which pre-beta build number) of Windows 7 running onan Asus Eee with 1 GB of RAM. Netbooks  -- which I'll use here to refer to low-cost, low-end PCs capable of running email and a Web browser, but little else -- are quickly becoming an increasingly large part of the overall PC market.

Here's where the speculation comes in. Many are assuming that because netbooks cost a few hundred dollars, Microsoft will charge netbook makers less per copy of Windows preloaded on these machines than they will charge OEMs for Windows 7 running on full-power laptops. They are basing this assumption on the (seemingly logical) conclusion that PC makers won't be willing to pay one-fourth or more of the price per machine for the operating system.

Some also are basing their calculations on the fact that Microsoft admitted during its most recent earnings call that its Windows client business was down, in part, because the company is licensing the less-pricey Windows XP to netbook makers because Vista is too big to run on most netbooks. (A distinction lost on some: Microsoft's revenues were down because XP is cheaper than Vista per copy -- not because it charged netbook makers less than full-fledged PC makers per copy of Windows.)

Microsoft won't talk publicly about how much it charges OEMs per copy of Windows they preload on new machines. As a result of the company's settlement years ago with the U.S. Department of Justice, we do know that Microsoft can no longer use the price of Windows to discriminate against its top 20 PC maker partners. All of these partners pay the same per copy of Windows. (Below that top tier, there is more variance in pricing, based on volume of machines sold and other factors.)

"Getting an answer to what Microsoft charges an OEM is nearly impossible," said Michael Cherry, an analyst with Directions on Microsoft. "Neither Microsoft nor the OEMs like to talk about this. Anecdotally, I have heard from the OEMs and Wall Street Analysts that the Windows OS could be the emost expensive single element in a PC. I have also heard people suggest it is the only element that never goes down in price. But I cannot vouch for the truth of these assertions."

I've heard the same "anecdotes" as Cherry. Back in the Windows 95 days, I do know Microsoft was charging the top PC makers roughly $60 to $70  per copy of Windows on new machines. Each subsequent version of Windows typically cost OEMs a few dollars more -- regardless of how much the PC sells for at retail/in volume. Microsoft argued that it was including more features and functionality in each new release, so even if consumers weren't willing to pay more per PC, OEMs should have to cough up more money for each  new version of Windows.

Microsoft's relationship with its PC-maker partners is not totally adversarial. With Windows Vista, for example, Microsoft and the OEMs were in cahoots to find a way to get users to buy "premium" PCs running "premium" releases of Windows. (A plan that backfired, by the way, as the ongoing class-action suit over "Windows Capable" has made all too clear.) With Windows 7, Microsoft and certain PC makers are looking to offset plummeting PC revenues with higher-priced touch-enabled PCs.

Once Windows 7 does launch -- which increasingly looks like next next summer/fall -- PC makers at both the high and low ends of the market will be jockeying for position, analyst Peter O'Kelly, pricinpal analyst with O'Kelly Consulting, notes. But that doesn't mean Microsoft necessarily will take a revenue hit, he says.

"I frankly think it's going to be a very different landscape in the 'netbook' market next year, especially after Windows 7 is released, with the incumbent hardware vendors taking the lead, and vendors such as Asus having to get creative in terms of feature/function and price differentiation.  While small form factor laptops were priced as premium business road warrior PCs a year or two ago, at this point Dell, HP, and others are very aggressively competing for what most people would define as the 'netbook' market.

"So while Microsoft may need to get more aggressive on pricing, e.g., if a hardware vendor is able to deliver a compelling non-Windows 'netbook,' I expect the pricing will probably stay in line with other Windows form factor pricing/licensing models."

There's just under a year to go (if the Softies get Windows 7 out for back-to-school 2009) until we see how this all plays out. What are your predictions? Will Microsoft be willing to do what it seemingly has never done before and reduce the price-per-copy it charges PC makers for Windows? Will users be willing to pay a premium for touch PCs?

Topics: Hardware, Microsoft, Operating Systems, Software, Windows

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

253 comments
Log in or register to join the discussion
  • Linux will drive the price down

    Microsoft have basically painted themselves into a corner with Vista, since it's just not suitable for netbooks. Windows 7 seems unlikely to offer much improvement, and Microsoft's gamble on Moore's law hasn't paid off.

    The reason for this is that their OS just doesn't componentise well, though development on Core and componentising .net should help matters. These won't be delivered for Windows 7.

    MS is terrified of Linux gaining market share, so their only options are to sell XP cheap, and sell Windows 7 cheap. The netbook versions of Ubuntu are beautiful and customers will see little value in paying the Windows premium.

    Microsoft's response should be to completely redesign the kernel, and produce a "core" version of their desktop OS. They are working on this, but it won't hit Windows 7.

    Meanwhile I await someone with cash (e.g. Google) to back Linux seriously and give Microsoft a run for its money. Google already has Android for mobile devices so it would be logical for them to move into netbooks.
    calumg
    • Eh?

      Since Windows 7 will run on netbooks I'm not sure what your argument is here.

      My guess is that there will be a Home Basic version of W7 which is distributed to netbook OEMs at a price comparable to, say, XP Home or Vista Home Basic.
      Sleeper Service
      • Just to clue you in...

        ...since you're apparently not very familiar with Microsoft: seeing Ballmer demoing what is apparently Windows 7 running on a netbook does NOT logically imply the following:

        1) Windows 7 will actually run serviceably on any netbook. Initial indication are that it's nothing more than Vista Rewarmed:
        http://blogs.computerworld.com/the_big_windows_7_lie

        2) Windows 7 will arrive in 2009. What? Please. No, seriously, we've heard this joke before. "Previews" of Vista started in, what, 2001? The "Alpha Release" happened in 2002! What transpired in the 3.5-4 years between the alpha and the beta? Microsoft started yanking out features (WinFS sounded like a great idea, too bad) and desperately cludging together enough pieces so that it mildly resembled an operating system, that's what happened. That facsimile you're being told is a "preview" of Windows 7 won't look anything like what hits the shelves 3 years from now. Microsoft doesn't do "leaner." They only do "bloatier." I'm sorry, that should be "feature enhanced."

        Oh, by the way: even XP Home is a pig on a netbook, according to the numerous anguished postings I'm reading on various forums. You seriously think that Windows 7 will somehow, magically, reverse 25 years of Microsoft history? If you do, I've got some "Vista Capable" desktops you might be interested in.
        UserLand
        • Rather then speculate .....

          ... just get the facts.

          http://channel9.msdn.com/shows/Going+Deep/Mark-Russinovich-Inside-Windows-7/

          Mark probably knows better then any blogger what is in the windows kernel.
          ShadeTree
          • Let's see...

            Great, point at something that requires an obscure Microsoft technology that's non-cross-platform and that nobody but Microsoft uses. Real impressive.

            Now, here's the pertinent question: Does Mr. Russinovich reveal any benchmarks? Because my man did. Listening to a Microsoft employee expound on OS theory hasn't an iota to do with real-world Windows 7 performance on netbooks. In theory, Windows 7 is spectacular! Just like Vista pre-SP1 was spectacular (and I'm sure Mr. Russinovich had a nifty little video clip back 30 months ago explaining how revolutionary Vista's OS design would be). You're hanging on breathlessly to what is essentially marketspeak. Time to start thinking critically. Theory and execution are two completely different things, and you'd know that if you were intellectually honest, knew how things worked in the real world, and had critical thinking skills.
            UserLand
          • Price and stability will be W7 killers if not good.

            Linux is great. OS X is great. No problem with either. I like both. But I like Vista, as well.

            In my opinion, it isn't so much that these other OSes win people away from Windows. It is more like Microsoft pushes those people away. Then, the people pick something else that works. So far, Microsoft hasn't figured out why they are pushing more and more people away. Their management just aren't bright enough to figure it out, apparently.

            The biggest issues that will affect Windows 7 acceptance are stability and pricing, with performance a distant third. If MS continues with their "screw the consumer" pricing trend, they will continue to lose users. If they continue releasing products which give consumers stability headaches, they will continue to lose users. People are avoiding Vista because of these two main issues. It is STILL overpriced. It has a history of stability issues (pre-sp1). It also has a history of lackluster performance (pre-sp1) which boosts user irritation.

            Even performance wasn't a deal-breaker issue for most users (gamers aside) until netbooks arrived. In that category, CPU and memory performance has pulled up nearly equal in importance to the other two issues. So now Microsoft has to address all three to be truly successful with W7.

            If they want W7 to be well (and quickly) accepted, they will have to lower the pricing (and remove version confusion) versus Vista, make certain it is stable, and make it run leaner/quicker. So far, I've only seen Microsoft addressing the stability and performance issues. Until they publicly address the pricing (and version confusion) issues, nobody is going to bet on their success, and the mass exodus to other platforms will continue. They have to address all three.

            The bottom line: Microsoft is boosting the success of Linux and OS X by not addressing all three of the primary issues which have prevented acceptance of Vista. Windows 7 looks like more of the same.
            BillDem
          • You could of just said ...

            ... you aren't smart enough to understand it. The kernel discussion is as appropriate to Linux as it is to Windows.
            ShadeTree
          • I'm not surprised.

            That was a joke.
            kozmcrae
        • reading blogs

          Reading a blog by a Linux evangelist at computerworld and taking it as truth is about as reliable as reading Ballmer's blog and accepting THAT.

          Your computerworld blog also referenced a pre-SP1 vista test, hardly an honest comparison 8 months later.

          A multitude of Vista SP1 vs XP SP3 tests have been done since, and most find a very small percentage difference in performance. Try google.

          Or keep ignoring them, they don't help your argument.
          coffeeshark
        • uh oh....

          Congraduration!
          You've just read a computerworld blog that quotes infoworld's Randall C. Kennedy blog!

          Once again, I congratulate you to become one of the Randall C. Kennedy's victim.
          Samic
          • Post 'em!

            You got better benchmarks, Ace? Post 'em! No, seriously, you won't break our tiny little hearts if you show Windows 7 kicking the stuffings out of Linux on any netbook. As a matter of fact, I'll be the first in line to buy one if that scenario comes to pass.

            In the meantime, I'll just have to assume you're a Waggener-Edstrom contractor.
            UserLand
          • Well since 70%...

            ...of netbook sales have XP installs I think it's safe to say that Linux is already getting the stuffing kicked out of it.

            Let's face it: to stimulate demand ASUS started offering XP as an option so more people would by it so in effect Linux's Netbook share has dropped from 100% to 30%.

            Sorry to be the bearer of bad news, chaps.
            Sleeper Service
          • And?

            [i]Sorry to be the bearer of bad news, chaps. [/i]

            Who's complaining about a 30% market share? By your logic Toyota should stop selling automobiles since they only have a 20% market share. ;)
            MisterMiester
          • Nope...

            ...because Toyota's share is pretty stable whilst Linux's is going to continue to decrease.

            Basically because no-one outside the tech field cares about it and it really only got used in the first place because of the storage limitations.

            Sorry.
            Sleeper Service
          • @Sleeper - Uh?

            [i]...because Toyota's share is pretty stable whilst Linux's is going to continue to decrease.[/i]

            Really?

            [i]Linux, equipped in 30 percent to 40 percent of Eee PCs sold, will probably sustain a market share of about 30 percent, said Samson Hu, a general manager at Asustek. The company estimates it will ship at least 5 million Eee PCs in 2008 after selling about 4 million since the product's debut.[/i]

            http://www.bloomberg.com/apps/news?pid=20601103&sid=a3VyE_ofSwwE&refer=news

            Get over it, Linux is here to stay on the netbooks. ;)
            MisterMiester
          • Decrease from what?

            "..because Toyota's share is pretty stable whilst Linux's is going to continue to decrease."

            Linux is not decreasing from zero. To admit that Linux is losing market share is to admit that it started from nothing to becoming a threat to Microsoft. Now here's some good advice. Just keep a close eye on Linuxes desktop market share, a very close eye.
            kozmcrae
          • Tut Tut, Mister Meister...

            ...you appear to have missed a bit:

            "Acer, which is aiming to sell 5 million to 6 million AspireOne laptops this year, estimates that Linux-equipped models account for about 20 percent of its shipments, spokesman Henry Wang said."

            So Linux is decreasing from the 30-40 percent to 30% in ASUS's estimates and Acer estimate that it'll drop to 20% next year. And all this before W7 comes out and pricing is announced.

            Therefore Linux on netbooks has lost market share - because it had 100% at the start - and continues to do so. Sure, it might retain 10-20% (the random ASUS general manager they quote is being more than slightly optimistic) of the market but it'll still be a curio.

            That said, that 10-20% will probably double or triple Linux's market share which, to be honest, I won't be keeping an eye on because it's still going to be buttons.
            Sleeper Service
          • @Sleeper - Logic problems?

            Asus creates a market for a new type of notebook, decides to put Linux on the product. An entrenched competitor with 90% market share in the industry and billions of dollars at its disposal decides to enter the market with discounts and incentives.

            After the dust settles Linux retains 30% of the overall share of the netbook market. Microsoft in response decides to revamp its existing OS to work better on these netbooks. In response to that Canonical signs a MOA with ARM to run a full desktop version of Ubuntu on the next generation of low cost ARM equipped devices.

            This is called competition, something that has been missing from the OS industry for the last 10-15 years. When you have a competitive environment the real winners are the consumers who end up with better products at lower prices.

            You seem to feel that this is a loss for some reason because the average person would be tickled pink if they could get more for less. So it's very reasonable to believe that you keep advocating your theory because you personally benefit from less competition and higher prices, or you're just a dumb @ss that likes to shoot himself in the foot by paying higher prices for less product.

            [i]Adversus solem ne loquitor[/i] ;)
            MisterMiester
          • Which would be fine except...

            "...decides to enter the market with discounts and incentives."

            Correct me if I'm wrong but don't the XP versions generally cost more than the Linux versions?

            I believe in competition but it's pretty clear who the winner in this competition is.
            Sleeper Service
          • Personal experience

            While I haven't run Win7 on a netbook, I HAVE downloaded an illegal copy and run it in a slow VM with only 512MB RAM. It was incredibly snappy. Shockingly so, in fact. I have no doubt that it will run perfectly on the netbooks sold at the end of next year. Current ones are at the 1GB mark. December 2009 should see 2GB as standard. Heck ... even Vista would run in that. It won't, however, run acceptably in the 512MB that Win7 apparently will.

            WRT the Vista vs. Win7 benchmarks: they're not important. Win XP SP3 and Visat SP1 are basically tied in both synthetic and game benchmarks. XP is being sold on netbooks now. If Win7 is at the same performance level, who will care come next year?

            I'm an eleven year Linux user (on the desktop). Win7 scares the bejeezus out of me. MS may finally have made a secure, modular operating system that performs well.
            daengbo