Microsoft Insists It's Not Worried About Netbooks6:36 PM EST Fri. Jul. 24, 2009
The once-healthy Windows cash cow is starting to exhibit signs of bovine spongiform encephalopathy. Microsoft's Client division stumbled to its first-ever annual revenue decline in fiscal 2009 and saw fourth-quarter revenue fall more than $1 billion. And some of that weakness is the result of the growing popularity of netbooks.
Microsoft's overall OEM revenue fell 24 percent during the quarter, which Microsoft attributed to PC market weakness and the shift toward lower-priced netbook offerings like Windows XP Home. OEM premium mix, which pertains to sales of higher-priced versions of Windows vs. lower-priced ones, fell 13 percent during the quarter and now stands at 59 percent.
Yet, in spite of the evidence that netbooks are deleterious to Microsoft's revenue, Steven Guggenheimer, corporate vice president of Microsoft's OEM division, said Microsoft doesn't see netbooks as a threat.
"I don't think we think about [netbooks] as hurting the business or not. I think we think about [them] as another aspect of the laptop market," Guggenheimer said in an interview earlier this month at Microsoft's Worldwide Partner Conference.
Microsoft has long been working to get Windows running on small devices and was an early participant in the One Laptop Per Child program, and this enabled the company to react quickly to the opportunity netbooks represent to get Windows onto more devices, according to Guggenheimer.
"When the netbook came out, there wasn't a version of Windows for it. So, we adapted and came up with a version of XP, and that's what helped the market go forward," Guggenheimer said. "If you look at the percentage of netbooks running Linux today, I think Windows has actually helped make that market more successful."
Nonetheless, some Microsoft partners disagree with Guggenheimer's assertion that netbooks aren't a threat.
"I think Microsoft is very afraid of netbooks -- how could they not be?" said Andy Kretzer, director of sales and marketing at Bold Data Technology, a Fremont, Calif.-based system builder.
Kretzer believes it'll be difficult for Microsoft to start charging more for Windows 7 on netbooks. "As prices on PCs continue to plummet, the 'Microsoft tax' on each machine begins to stick out like a sore thumb. When the OS is a third to half the price of a unit, people start to investigate other options," Kretzer said.
Microsoft is believed to charge OEMs between $20 and $25 per copy of XP Home on netbooks and it'll definitely have to charge more than that for Windows 7 on netbooks. Matt Rosoff, an analyst with Directions On Microsoft, expects Microsoft to charge $20 or $30 more per unit for Windows 7 on netbooks compared to XP Home.
However, if Microsoft charges too much it risks driving more buyers to Linux netbooks. Tim Ulmen, principal at Midwest IT Solutions Group, Wichita, Kan., says OEMs have already slashed netbook prices to the bone and won't be able to take on the potential added costs of Windows 7.
"Whether it's XP Home or some entry-level version of Windows 7, overall price point is a key element to the success of the netbook, and I don't think the hardware vendors can squeeze any more out of their costs," Ulmen said.
Google's Chrome OS represents another looming threat for Microsoft. Although little more than vapor at this point, Google has said Chrome OS is designed specifically for netbooks, and some analysts believe that Google could add legitimacy to the idea of Linux on the desktop and lend it valuable name-brand recognition.
"Linux is still a potential platform for netbooks, but I think Google has the biggest chance of being disruptive," said Ken Winell, CEO of ExpertCollab, a SharePoint-focused solution provider in Florham Park, N.J.
Despite these threats, Microsoft expects Windows 7's arrival this fall to clarify the role of the netbook in the PC market. The notion of netbooks as a new class of device arose from the fact that they were unable to run Vista, but Guggenheimer predicts that when Windows 7 arrives, that will cease to be the case.
"Vista didn't fit well on [netbooks], which allowed for the perception of a discontinuity," Guggenheimer said. "But as soon as you have Windows 7 out there, and it works cleanly and you have all versions for it, then it'll just become part of the laptop family. I think we see that as good, [because it'll mean] more machines, hopefully, that are shipping now."