April 20, 2009

Netbooks Causes MS Gamble On Windows 7

Microsoft Corp. is taking an unusual approach with its new Windows 7 operating system: Customers buying many of the least-expensive laptops with the software are likely to be limited to running three applications at a time and miss out on other key features, or pay for an upgrade

The strategy is one of the ways the software giant is responding to inexpensive portable computers called netbooks, a bright spot in the gloomy personal-computer business that is causing many companies to modify their business plans.

Microsoft Gambles on Windows 7 'Starter' - WSJ.com

Netbooks -- compact laptops that can cost less than $300 -- pose problems for Microsoft because it can't charge computer makers as much for software used on the low-end systems as for standard desktops and laptops. The financial effects were felt in the quarter ended in December, when it contributed to an 8% decline in Windows revenue. Investors will be searching Microsoft's quarterly financial results this Thursday for further signs of netbooks' impact.

The situation creates a dual challenge in launching Windows 7, which is expected to be released this fall. The company must try to protect Windows profit, a business that accounted for more than half of operating income in its last quarter, while trying to keep alternatives such as Google Inc.'s Android and other software based on the Linux operating system -- often less expensive or free -- from taking over the netbook market.

Microsoft managed to grab the lion's share of netbook sales last year, but at a heavy cost. It was forced to offer Windows XP -- a version of the operating system it had largely phased out -- at bargain prices to counter Linux versions.

A Microsoft spokeswoman declined to discuss prices it offers PC makers, but people familiar with the matter say the company takes in less than $15 per netbook for Windows XP once marketing rebates are taken into account -- far less than the estimated $50 to $60 it receives for PCs running Windows Vista, a newer operating system that runs on standard desktop and laptop PCs.

Netbooks are expected to run better on Windows 7 than Vista, which required more powerful hardware than netbooks offered. To encourage use of the new software, the company plans to offer a version called Starter that will be inexpensive but comes with significant limits. Besides only running three application programs at a time, Starter will also lack some spiffy graphical interface features of other versions of Windows 7.

Brad Brooks, corporate vice president for Windows product marketing at Microsoft, said it created Starter so it can offer Windows 7 on even the least expensive netbooks. Even with its limits, Mr. Brooks said Starter is an easier and more reliable operating system than Windows XP.

"When you see Starter on netbooks, there are a lot of impressions that it is limited," said Mr. Brooks. "It's a pretty robust operating system for customers at the price points we're giving it to them."

Customers who aren't satisfied will have the option to pay an additional fee to upgrade to a higher-end version of the software, a process that will involve unlocking advanced Windows 7 features that are already stored on their PCs. Pricing for Starter, or for the upgrade, isn't yet known.

Sumit Agnihotry, a vice president of product marketing at Acer Inc. -- one of the biggest netbook suppliers -- wouldn't say whether Acer plans to use the Windows 7 Starter version. But he said that being able to run just three applications -- and the requirement that customers pay extra for a higher-end version -- could be a tough sell, since Windows XP has no such limits.

Acer expects to sell models at different price increments, Mr. Agnihotry said, noting that customers are willing to pay more for features beyond what XP offers. Acer is "very sensitive about adding new cost" since netbooks' greatest attraction is their low price, he said.

Intel Corp., a longtime Microsoft ally whose Atom microprocessor powers most netbooks, has also voiced some skepticism about Microsoft's Windows 7 plans. Intel Chief Executive Paul Otellini said at an investor conference in February that Microsoft's plan to convince consumers to upgrade from the Starter version "is going to be tough for a bunch of reasons."

Intel has financed the development of Moblin, a Linux-based operating system for netbooks and other devices whose oversight was recently shifted to the nonprofit Linux Foundation.
[windows 7] Acer Inc.

Acer's Aspire One netbook.

The debate over Windows 7 is one of many triggered by the rapid rise of netbooks. Gartner, a market research firm, recently predicted unit sales of netbooks will grow nearly 80% this year to 21 million units, while overall PC sales decline a record 11.9%.

One question is whether chip makers that license designs from ARM Holdings PLC -- whose technology is best known on cellphones -- will be able to displace Intel on lower-priced systems running versions of Linux.

Jim Zemlin, the Linux Foundation's executive director, thinks Microsoft faces the greatest pressure as the computer market takes on more aspects of the cellphone market -- with carriers subsidizing hardware prices with fees for data-service plans. Those carriers won't want to pay much for operating systems, he argues, and will want to customize Moblin or other Linux versions in ways Microsoft doesn't typically allow.

Microsoft, however, counters that netbooks running Linux have a big disadvantage: They don't run many popular PC applications such as iTunes and Office.
—Justin Scheck contributed to this article.

Write to Nick Wingfield at [email protected] and Don Clark at [email protected]

Posted by staff at April 20, 2009 03:10 PM