Microsoft's biggest challenge: All netbooks all the time

The news today from IDC that PC processor shipments fell last quarter at the fastest rate ever recorded since IDC began tracking shipments in 1996 is even worse for Microsoft than you might imagine. That 17% decline over the previous quarter would have been far worse if sales of Atom chips --- the brains of netbooks --- hadn't continued to grow. And the growth of netbooks is bad for Microsoft.

Here's what Computerworld says about the IDC report:

Microprocessor unit shipments will decline by about 15% in 2009 compared to last year, according to preliminary numbers from the market researcher. Worldwide microprocessor shipments during the fourth quarter dropped 17% sequentially and 11.4% year over year, IDC said.

Things appear to be getting worse. Shane Rau, an analyst at IDC, told Computerworld, "After hinting at a decline last September, the market fell off a cliff in October and November."

It would have been even worse if it weren't for Atom chips, whose sales grew while sales of other chips declined. If it weren't for sales of Atom chips, shipments of the processors would have declined 21.7% from the previous quarter, and 21.6% from the previous year. Sales of actual netbooks bear that out. Some 10 million netbooks were sold in 2008.

IDC expects that PC processor sales will continue to decline through at least the first half of 2009. But don't expect Atom chips to fall.

Microsoft will be hit badly by this. Approximately 30% of netbooks ship with Linux, which means that Microsoft loses out both on sales of Windows and Office on those machines. The news is worse than that, though. Microsoft gets less per copy of Windows sold on a netbook compared to a desktop or laptop, so it's losing revenue there as well. And very few netbook owners will be willing to fork over the hundreds of dollars you need to spend to buy Office, so it's losing there as well.

When Windows 7 ships, Microsoft will likely unleash a big marketing campaign for Windows 7 on netbooks, and Linux sales of netbooks will most likely plummet. Still, Microsoft will still be losing money on Windows netbooks because of the lower fees it gets for Windows, and because few netbook owners will buy Office.

That's one more reason why Microsoft's online strategy needs to work --- without it, netbooks will continue to eat a hole in its profits.

Copyright © 2009 IDG Communications, Inc.

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