Market Analyst Prediction – Microsoft Should Fear Netbooks

Netbooks are the darling of the computer market right now. Definitely the fastest growing segment are those little, lightweight units, easily carried for hours by the girliest of men.

Seriously, the netbook is something that is going to reach down into levels of the population never thought of before, not only because of its diminutive size, but because of the price points the units can sink to.

One of the problems for Microsoft however, with this growing market start, is the lack of storage space and processing power. The majority of netbooks shipping now have Windows XP, and this doesn’t make big dollars for them, while also forcing their continuing support of the operating system the company wishes it could quickly kill off.

To muddy the waters, and possibly sully a good reputation not yet fully in stone, Microsoft has released a tool to ease the installation of Windows 7 on a USB stick, so as to negate problems with netbooks having no optical drive, and many people not having access to an external USB optical. The tool takes the thumbdrive and prepares it for the installation of Windows 7 from an ISO file, which then will make the thumbdrive bootable, and as long as the netbook can boot from a USB device, the user is golden. The problem is that any version of Windows 7 is still going to be a larger install than Windows XP on the storage medium, and more work for the processor than Windows XP also. Since most netbooks have the Intel Atom processor, the job of shouldering Windows 7 is possible, but any references to ’snappy performance’ or use of the technical term ‘zippy’ will be gone.

Those in the know will state that the Starter Edition  of Windows 7 is available, but actually not easily available, if at all, in the United States. Besides, who will want to install (not to mention pay for) something that is referred to as crippled from the start?

No, many will want their notebooks to have those neat features like they see in their friends’ versions of Windows 7, on desktops. So, what they will probably end up with is the equally beautiful, much faster, and light-weight Linux. There are many flavors, and if one is willing to pay, Xandros can be had, still cheaper than Windows 7, with a feel very much like Windows XP, and the panache of Windows 7. For those wanting completely free, Ubuntu is very nice, and gets prettier with each six month release – you can’t say that about any version of Windows, ever.

Strong sales of netbook computers, combined with plummeting sales of Microsoft Office to consumers, hurt Microsoft Corp.’s otherwise-strong first-quarter 2010 results reported late last week.

At least one analyst expects the trend to continue, even with the release of a netbook-friendly Windows 7 and a free Web version of Office for consumers.

Netbooks made up about 12% of total Windows shipments in the first quarter, Microsoft general manager for investor relations, Bill Koefoed, said in a conference call after the earnings release. And netbook shipments are likely to keep growing faster than the rest of the market, acknowledged Chief Financial Officer Chris Liddell.

Due to Vista’s bloated operating system, which takes more hard drive space and processing power, those netbooks almost all run Windows XP. Microsoft reportedly earns about $15 for every copy of Windows XP sold to a PC maker, or original equipment manufacturer (OEM), compared with $50 to $60 for every copy of Vista, and now, Windows 7, sold to PC makers.

The quote from PC World tells the tale; Microsoft will be losing between $35 to $50 for each netbook delivered with Windows XP, and loses entirely if the netbook has something else on it. I believe this will become true, as Microsoft will look at the large adoption rate of Windows 7 elsewhere, and shoot itself in the foot by telling netbook suppliers that they must now use Windows 7.

The Starter Edition will not be well received, as it is crippled, and the full editions will make the netbooks run like molasses, and lessen the overall reputation of Windows 7. (remember, one of the most endearing aspects of the netbook is low price, so a faster processor, or more storage space, and RAM, will not help make sales go up.)

As a result, OEM revenue was down 6% year-over-year, despite Microsoft’s selling an unspecified “record number of Windows licenses” this quarter due to the release of Windows 7 to OEMs in July. Total Windows revenue of $4.09 billion was down 4% from a year ago.

Microsoft is trying to entice netbook makers to switch to the relatively streamlined Windows 7, especially the low-end Windows 7 Starter.

Microsoft did not say how many netbooks this quarter shipped with Windows 7 instead of XP.

Why would Microsoft leak these figures any earlier than it has to? It will only upset and annoy the shareholders.

According to Rob Helm, an analyst with the independent Directions on Microsoft, Windows 7 Starter costs OEMs about twice as much as XP. For most netbooks, that will be too high, he said. As a result, he doesn’t expect most OEMs to switch off XP until it is phased out next fall.

Meanwhile, Microsoft Business Division revenue fell 11% year-on-year to $4.4 billion, dragged down by a 34% year-over-year decline in consumer sales. That mirrors a 30% annual drop in the prior quarter. Sales to consumers make up about a quarter of MBD’s total revenue. They come mostly from retail sales of Microsoft Office.

Microsoft has juiced Office sales in the last several years through heavy promotions for students, military personnel, retirees and other groups.

That means another few quarters of losses. Also, with users going to netbooks the Office behemoth just won’t fit. Choices like Open Office and Google Docs are making Microsoft Office irrelevant for a large sector of the population.

When the corporate sector starts upgrading, both Office and Windows 7 will do very well, but with fewer home and small business customers, revenues show a trend downwards for the next few years.

Time for work on that new Xbox 360!  er, 540? … 720?

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