The biggest threat to Microsoft isn't Apple or Linux, it's falling hardware prices

Two interesting tidbits of news about Microsoft today. First is that the company is to make it legal to rent both Windows and Office. The second is an analysis on how slates will affect the Redmond giant's bottom line. Both are interesting reading, but both also are indications of the problems that Microsoft is likely to encounter over the coming years.

See, when zealots debate the old "Windows vs. Mac vs. Linux" argument, it's a widely held belief within the Mac and Linux camp that it is one of these platforms that represent the greatest threat to Microsoft's dominance.

Utter nonsense.

Take a look at Microsoft's business model. It's all about selling expensive software to users, and then, later on down the line, selling those same people an upgrade. Rinse and repeat. But this model is not what it used to be. The problem facing Microsoft is that as hardware prices drop, this puts pressure on Microsoft to lower prices. Moreover, the problem is that as CPUs get faster, hard drives get bigger, and components become more and more integrated, the pressure will continue.

Another problem facing Microsoft is the type of PCs that are selling well. Desktop sales (and notebooks for that matter) aren't selling like they used to. What have been selling well are the cheaper "PC companion" netbooks (because they are cheap). Problem here is that Microsoft doesn't get the same for a copy of Windows for a netbook as it does for a desktop or notebook. Microsoft was getting as little as $15 per copy for Windows XP for netbooks. Sure, that's better than having Linux pre-loaded on the netbook and getting nothing, but it's still quite a cut.

So, a weaker economy, combined with having to take a cut on how much it gets for every Windows license sold means that Microsoft is being forced to evolve. Problem is, this evolution at present consists of little more than looking under the sofa cushions for loose change that's fallen out of people's pockets, and lashings of wishful thinking. The cash that Microsoft will get in from rentals of Windows and Office will, at best, be peanuts. And hoping that slates will be seen as "PC companions" rather than desktop replacements is the sort of thinking that requires whole handfuls of four-leaf clovers.

My prediction is that we're going to see Microsoft flip over more couches looking for spare change over the coming months and years looking for ways to buoy up the bottom line.