We’ve known for a while that Microsoft was offering Windows XP to netbook makers at a deep discount. Now we know roughly how deep that discount is. The Wall Street Journal says Microsoft is getting about $15 for every netbook that’s sold with Windows XP. That’s compared to the $50 to $60 the software company gets for computers sold with Windows Vista. 

Early netbook makers like Asus put Microsoft in a tough spot by offering mini-laptops preloaded with Linux. Asus set the bar low for netbook pricing, with the first Eee PC 701 debuting for $399. Prices have fallen since then, and you can often find much more capable machines for $300 or less. Some run Linux, but most run Windows. But in order to compete with the free Linux operating system, Microsoft had to bring down its pricing to a competitive level. 

Now with Windows 7 on the horizon, Microsoft is taking a different approach. It will offer several different versions of Windows 7, all of which are capable of running on low powered netbooks. But the cheap version will be Windows 7 Starter Edition, which comes with several severe limitations. For one thing, you’ll only be able to run three programs at a time. For another, personalization and customization options will be missing. You may not even be able to change the desktop background.

It’s not clear yet how much Microsoft will charge computer manufacturers for Windows 7 Starter Edition licenses (this version of the OS won’t be sold to customers through retail channels), but if you buy a netbook running Windows 7 Starter you’ll be able to pay to upgrade the OS and unlock some of those missing features. So I wouldn’t be surprised if Windows 7 Starter sells for somewhere around $15, but Microsoft tries to encourage consumers to shell out an extra $40 or $50 to upgrade to Windows 7 Home Premium.

But here’s the question: Would you rather buy a netbook with a deliberately crippled OS that still costs more than Linux, and pay for an upgrade, or just buy a cheap laptop that runs a fully functional Linux distribution like Ubuntu, Mandriva, Xandros, or Linpus Linux Lite? OK, if you’re reading this there’s a good chance you’re a geek and you’re not scared by Linux. So let me rephrase the question and ask which netbook operating system option would you recommend to your friends and family members?

Kristin Shoemaker at OStatic raises another good question: Is Microsoft trying to hold onto its netbook market share with Windows 7? Or is it trying to stomp out netbooks altogether?

If we put on our conspiracy caps, the latter approach could make sense. Microsoft saw that Asus and others were successfully selling netbooks with Linux in 2007 and early 2008. So it jumped in and started offering cheap Windows XP licenses until Windows had a huge netbook market share. Today most people think of netbooks as cheap, tiny computers that run Windows. So what happens later this year or early next year when consumers go to buy a netbook and find it’s incapable of doing all the things you would expect of a Windows computer? Do they upgrade, switch to a lesser known alternative OS like Google Android or Linux, or just give up and buy a more expensive laptop?

There’s no question that Microsoft and many computer hardware makers would be happier selling software and devices with higher profit margins. But netbooks are selling like hotcakes today. And while it would seem silly to deliberately sabotage a growing industry niche, that could be part of the thinking behind Windows 7 Starter Edition. After all, if people start to think of netbooks as less capable devices that are at best, big cellphones with web browsers and keyboards capable of running Windows CE or Google Android, but not Windows, people might buy them as second or third machines and not as primary laptops.

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16 replies on “Microsoft makes $15 for every netbook sold with Windows XP”

  1. Never, *ever* underestimate what price will do to a consumer’s decision making. It’s how companies like Coby, Mitsuba, and their ilk stay in business.

    The netbook is here to stay. It’s the commodity computer, you can get it with cellphone company data plans, and in the future I expect to see other ways to get them subsidized.

    And…I can *kind* of see why they’d do it. Intel wants to eventually get Atom into Cellphones/MIDs…and at least with the cellphone market it’s not something they’re in right now…and the low cost chips there don’t cannibalize their profits centers like Netbooks do.

    And of course MS wants you to experience their full OS in all it’s $60 per OEM glory(Four times the cash? Really, who *wouldn’t* push for that?!). Of course windows 7 *will* run on netbooks…but you can get so much more of their Aero/media/glorious-computing-life from a good, solid $500-800 Laptop.

    But. It’s not like companies won’t just switch to ARM and Android/linux/whatever if MS and Intel took their ball and went home, anyway. The market is proven, the money is there. There are more than enough(Mostly non-American)companies out there who want to feed this market.

    But at the same time…who wants to turn away money? No, I don’t think the big players are going to kill this goose, even if its’ eggs lack some golden luster.

    But…even if there are missteps, the competitors are coming. IBM has their new chip, the ARM crew is coming on fast…and the more I think about it, an Android machine with an integrated App store is a great idea for a full featured alternative with a built in market for developers.

    One wonders if Apple aren’t thinking the same thing…

  2. Great post.

    I’m a geek, but I’m a little scared of Linux, mostly because I haven’t been able to get it fully configured and 100% running on my NC10 netbook. I only got wifi working once, and then I rebooted and lost wifi, so I installed Windows 7 on it.

    I see netbooks splitting into two – the high end, which are just low-power, low-cost full-functionality ultraportables like my NC10, and the low-end, which are low-power and more like overgrown iPod Touches like the HP 1000 Mi (which is not quite there yet).

    I think people will be more amenable to Linux on the low end, but only if the netbook manufacturers put some time into it – both in the UI which needs to be optimized for a quick experience on a small screen and in the back end which needs to be optimized for speed and needs to support all the hardware. Delivering non-functional hardware that only works with Windows is not the right way. I’m looking at you, HP.

    1. Regarding the NC10, Samsung made some unfortunate choices with regards to hardware, and they have made their product very difficult to install Linux onto. This isn’t the fault of Linux, it’s just that Samsung used weird hardware, and nobody has reverse engineered it yet. If manufacturers would submit drivers to Linux, the way they do with windows, you wouldn’t have this problem. It’s too bad, as I really wanted a NC10 myself, but ended up getting a HP 2140, due to excellent Linux support.

    2. I don’t think the HP Mini 1000 typifies the low end at all. I don’t use it as my primary computer – that’s an iMac – but with 2GB of RAM and a functional total of 24GB SSD (16GB + an 8GB flash in the custom slot), it meets my portable needs for retail + $45 for the upgrades.

      I would NEVER go to Linux – even a high paid programmer friends got fed up with it on his PC and then on my Asus 701eee. I think that garden variety users will stick with Windows and learn to live with the 3 open app limitation, which doesn’t seem all that constrained because this is an ultraportable, not a desktop substitute.

  3. sadly im tempted to say that xandros and linpus offerings on netbooks are just as crippled as windows starter…

    1. Both of which are “commercial support” rather than “community support” distributions.

      Just because you see “Linux” in the name does not mean it is a complete
      version of a “community supported” distribution.

      If you really need “commercial support” – you can get a support contract from many
      of the major distributions. Such as Ubuntu, just send them money. 😉

  4. This is probably some conspiracy by both Micro$oft and Intel to kill sales of the netbooks which have turned into a Frankenstein’s (or is that Al Franken?) low margin monster for them.

    Get something like PuPeee fully functional on my Asus 1000H and I’d be happy. All I want my Netbook for is email and web browsing when I am on the road.

    Give it a user-friendly desktop interface and no geek-speak Linux knowledge and most users would be happy.

    I tried the latest PuPeee distribution and have it running from a 2GB thumb drive. The whole package takes up less than 110 MB on the drive.

  5. I can’t wait to see return rates on Windows climb because new users can’t do what they want with their netbooks. Yes, Microsoft would love to see the netbook market die, but I doubt they have the power to kill it. XP will probably be 7s largest competitor. The latest version of Ubuntu looks to be a worthy competetor too. Xandros and Linpus just were not what the market needed and the Suse implementation wasn’t quite ready for prime time. The second wave of linux netbooks could really give Microsoft fits. Not to mention the ARMbooks in Q4 / Q1 2010. Fun times.

    1. thats thanks to third party sponsoring.

      why do you think there is a 30 day norton security package on just about every big brand computer? because symantec pays them to put it there.

      1. Also remember that commercial versions of Linux aren’t totally free. Yes, you may be able to download that distro for free, but if you want to get commercial support (which hardware retailers need), you’ll need to pay $$. Thus, also making the netbook or whatever device somewhat expensive, but turn.self.off’s reason is most important.

  6. I have heard the 3-app-max and no desktop customization options before and neither really worries me. I do not run a dozen applications at once on any of my computers. At most, i may have a web browser open with my main application I am using and possibly windows explorer for file control. I also have no desktop background. I like a clean solid-color ( I use the basic windows blue on XP now) and very few icons. I expect to go out and get a copy of the starter edition (if it is available retail) and load onto my netbook as soon as possible.
    The rest of my family is another story. I don’t see either my wife or daughter being happy without the ability to place flowers, puppies, or anime characters on their desktop screens.

    1. starter will probably never be retail, at least not in developed portions of the world.

      its for OEM’s, specifically in places with rampant copyright infringement…

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