Ballmer confirms Windows 7 Starter restrictions for netbooks

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"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.

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