What's Microsoft's Next Move In Netbook Game?

As the netbook party continues to get louder and more rambunctious, at least one attendee is sulking in the corner of the room. That's Microsoft, which, in its last two quarterly earnings calls, has cited the popularity of netbooks as a reason for weakness in its traditionally healthy Windows client division.

In Microsoft's fiscal second quarter ended Dec. 31, client revenue dropped 8 percent compared to the year-ago quarter, while OEM revenue fell 12 percent, or $465 million, and OEM license units fell one percent.

Netbooks have become a problem for Microsoft because they ship with a version of Windows XP Home that's about half the price of the desktop version. According to solution providers, Microsoft charges local OEMs $32 for XP Home on netbooks, compared to around $65 for XP Home on desktops. Large OEMs are believed to pay much less.

Microsoft, like much of the IT industry, was caught off-guard by the rapid rise of the netbook category, but moved quickly to offer a netbook-specific version of XP Home to stem the tide of Linux on netbooks. When one considers that getting some revenue is better than getting none, that was a wise move.

But with Windows 7 slated for launch later this year, executives have been hammering home the message that the OS runs well on netbooks. Some channel partners say that given the recent quarterly shortfalls, Microsoft may alter its terms in order to extract more revenue from Windows 7 on netbooks.

"I believe Microsoft is seriously thinking about creating a separate SKU for Windows 7 on netbooks that's significantly more expensive than XP Home," said one source, who asked to remain anonymous.

A Microsoft spokesperson contacted by Channelweb.com said the company doesn't comment on Windows pricing issues. In any event, Microsoft won't stop selling XP on netbooks until June 30, 2010, or one year after the Windows 7 ship date, whichever comes later.

Microsoft may be able to stem its client losses by charging more for Windows 7 on netbooks, but if it's too aggressive, more customers might decide to opt for Linux-based netbooks. That's a particularly dangerous scenario given the recent major strides that Canonical has made with Ubuntu Desktop Linux 8.10.

In fact, the specter of Linux gaining ground on netbooks may force Microsoft to lower Windows pricing in the channel, a move that Microsoft partners say is long overdue, and would put even more pressure on Windows client revenue. "Microsoft needs to come up with a new pricing strategy across the board," said Todd Swank, vice president of marketing at system builder Nor-Tech.

"Pricing seems to have become so out of whack, and Microsoft hasn't had a price drop for a standard version of Windows for as long as I can remember. If they want to keep channel partners healthy and alive, that'd be a good move," Swank added.