Microsoft CEO Steve Ballmer recently confirmed that the company will limit Windows 7 Starter, the edition expected to end up on netbooks, to systems that sport small screens and low-powered processors.
During Microsoft's annual financial analyst day July 30, Ballmer got more specific than other executives in describing the limitations computer makers must abide by if they're to install Starter on their machines. Starter is the least feature-rich edition of the operating system available worldwide, and will not be sold direct to consumers or businesses. It will be available only to OEMs, or "original equipment manufacturers," such as Acer, ASUS, Dell, Hewlett-Packard and Toshiba.
"Our license tells you what a netbook is," said Ballmer at the Microsoft-hosted day with Wall Street analysts. "Our license says it's got to have a super-small screen, which means it probably has a super-small keyboard, and it has to have a certain processor and blah, blah, blah, blah, blah."
Although other Microsoft executives earlier this year said that the company would place restrictions on the kinds of processors and screen resolutions supported by Starter, Ballmer is the highest computer official yet to spell out Starter's limitations, if only in the broadest terms.
Last May, the Malaysian Web site TechARP.com, which regularly leaks information provided to computer makers by Microsoft, reported that the company would restrict Starter to specific netbook configurations. According to TechARP, Microsoft will only sell Starter to OEMs for use on netbooks that have a 10.2-in. or smaller screen, no more than 1GB of memory, a hard disk drive of 250GB or less (or a solid-state drive no larger than 64GB) and a single-core processor no faster than 2GHz.
Ballmer was frank with analysts about Microsoft's rationale for setting Starter's limitations. "We want people to be able to get the advantages of lightweight performance and be able to spend more money with us, with Intel, with HP, with Dell and with many, many others," he said.
"With today's netbooks, we sell you XP at a price," Ballmer continued. "When we launch Windows 7, an OEM can put XP on the machine at one price, Windows 7 Starter Edition at a higher price, Windows 7 Home Edition at a higher price, and Windows 7 Professional at a higher price."
Microsoft has not disclosed pricing for Starter, since the edition will be sold only in volume to OEMs, and will not be available to end users at retail. However, Ballmer made it plain that Microsoft hopes to coax users into purchasing PCs with higher-priced versions of Windows 7. "It's not just what are our prices -- that's partly in here -- but it's also a function of how well do we do getting, in any segment, people to buy the more expensive offering," he told analysts.
"They're trying to force people into higher-end SKUs," said Allan Krans, an analyst with Technology Business Research. "Selling XP at a low price to OEMs hurt them financially, and they're trying to figure out a way to stem that."
Last month, Microsoft said revenues for the Windows client division were down 29% year over year for the company's fiscal fourth quarter, which ended June 30. Microsoft blamed the fall-off on the increased sales of netbooks and a global slow-down of PC purchases.
Ballmer acknowledged that Microsoft made a mistake pricing licenses of Windows XP Home that it's been selling only to netbook makers since April 2008. "[Windows revenues are] down primarily because we did a program this year to cut prices in emerging markets with a theory that the lower price would lead to higher attach and higher total revenue," Ballmer said.
"The theory was wrong. It's not that it was untested, but it turns out the theory was wrong, and you will see us address the theory in the Windows 7 time frame. We're going to readjust those prices north, so to say, and I think with our Windows 7 SKU lineup, we also have a great chance to do some up-sell ... to Windows 7 Starter, Windows 7 Home...."
"They're trying to rectify the mistake," noted Krans. "But that will be very difficult for them to do. Netbook prices are low already, and adding another $20 or $30 for Windows 7 Starter will make it too tight for [OEMs[ to operate."
Microsoft doesn't divulge Windows prices to OEMs, but earlier this year the Wall Street Journal cited sources that claimed the company receives less than $15 per netbook for Windows XP, considerably less than the estimated $50 to $60 it gets for a Vista license.
Krans said higher prices for Windows 7 -- $30 to $40 more than XP Home -- would be a tough sell to netbook makers. "OEMs don't have a lot of wiggle room on price, since price points seem to be the most important feature for netbooks," said Krans.
The best Microsoft can hope for is to make a case for more capable, but still-inexpensive laptops that run one of the "premium" editions of Windows 7, like Home Premium or Professional. "Netbooks have their place, but low-end notebooks are a more compelling value," Krans said. "For $500 or less, low-end notebooks are going to have a much more usable keyboard and a more usable screen. They're better for the OEMs and for Microsoft, because there's more pricing flexibility there than in netbooks to make some sustainable margins."
Microsoft has committed to continue selling Windows XP Home to netbook makers for at least 12 months after the launch of Windows 7, or through October 2010.