Microsoft's Pyrrhic Victory in the Netbook War

The rise of the netbook has been an extraordinary saga. When the Asus Eee PC was first launched at the end of 2007, it seemed to come from nowhere: there was no real precedent for such a low-cost, small machine, using solid state storage and running GNU/Linux.

The brilliance of Asus's move was shown not just by the rapid uptake of this new form-factor, but also the high level of satisfaction – the only element viewed less positively was the small size of keyboard, an inevitable consequence of the design.

As I and many others pointed out at the time, the netbook would have been unthinkable without GNU/Linux.

In part because free software runs better than Windows on low-power systems, and is highly customisable, but also simply because of its low cost: had Asus decided to bundle Windows with the system, it is likely that the price would have been significantly higher, because Microsoft would have wanted to preserve the margins on its operating system, and there would have been no incentive for it to cut costs for the Eee PC, which threatened to cannibalise sales of Windows-based notebooks.

As it was, the Asus Eee PC ran GNU/Linux, and was a huge success, and Microsoft's hand was forced. To respond, it had to make two painful concessions. First, recognising that Windows Vista was simply too big and slow to run on netbooks, it had to extend support repeatedly for Windows XP, even though its stated plan was to phase it out.

Secondly, it had to accept massive cuts in the price it charged manufacturers in order to make Windows XP netbooks competitive with GNU/Linux-based systems.

The strategy worked, in the sense that the market share of Windows-based netbooks is now probably around 90%.

This has led some to claim that GNU/Linux has lost this market, and that Microsoft won. But if Microsoft were truly winning in this market, you would expect that it would do all it could to foster that sector. After all, companies tend to build on their successes. And yet at every turn, Microsoft is doing what it can to kill the whole netbook idea.

First, it wanted to limit the number of applications that could be run concurrently on netbooks using the entry-level Windows 7 Starter edition, but had to backtrack in the face of the uproar this provoked.

Next, it has laid down that netbooks running Windows cannot use hybrid storage – that is, solid state and a hard disc. Finally, it has redefined the netbook as a “low cost small notebook PC”.

These are all incontrovertible signs that Microsoft simply hates the netbook sector, and wants it to go away. It is doing everything it can to dissuade users from buying them, manufacturers from making them, and everyone from naming them. The reason why it wants the netbook to vanish is simple: thanks to GNU/Linux, it makes no money in this market. Worse, netbooks are, indeed, cannibalising its profits in the notebook sector – which is why it is trying to redefine them as notebooks so that it can “re-align” consumers' expectations – that is, charge more.

So, yes, Microsoft is “winning” the netbook wars in one sense, but it is a purely Pyrrhic victory.

The fruits of that “victory” can be seen in its recent financial results, which showed the first-ever drop in revenue, part of which was attributable to weakening sales of its Windows division.

And things will only get worse. It seems increasingly likely that Google's Android will appear widely on netbooks; it may be early days still for that platform, but there is no doubt that Google will use its considerable muscle to push it, both on mobiles and elsewhere. And if Android becomes popular on mobiles, that will help sales of netbooks using the same system.

Then there is the ARM chip, which promises to drive down the cost of netbooks even further, putting even more pressure on Microsoft's pricing for Windows-based systems.

On top of that, there is the slightly inconvenient fact that Windows 7 doesn't run on the architecture yet (and may not ever), which means that Microsoft can't even enter that sub-netbook sector.

Microsoft may have taken back the initiative when it comes to netbooks, but it has won the battle, not the war, and at a price that ultimately may prove too high to be worth it.

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Copyright © 2009 IDG Communications, Inc.

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