Compact and feature-light notebook PCs known as netbooks have gained traction amongst consumers during the past year. Netbooks are primarily used for accessing the internet and running light software applications. In order to keep the price of a netbook attractively low many netbooks come with the nearly free Linux operating system rather than Microsoft’s Windows operating system.
In addition to keeping Microsoft out of the fast growing netbook market, the wide adoption of Linux within netbooks may have consequences for Microsoft within the larger desktop and notebook markets. One of the barriers to wider adoption of Linux on desktops and notebooks is that the majority of PC users are already familiar with Windows. As consumers develop greater comfort with Linux through use on netbooks, the barriers to adoption elsewhere may fall. Furthermore, application developers looking to serve Linux-based netbook consumers are likely to focus additional efforts to Linux application development leading to greater application and driver availability which will make the platform even more attractive to consumers on the margin.
Microsoft is trying to counter the Linux threat with a netbook version of its Windows XP operating system that is priced at less than half (~$30 vs. ~$70) of full XP versions. We estimate that Microsoft’s average Windows Pricing for PC Makers will decline from $64 today to $57 by the end of the Trefis forecast period due in part to the increasing mix of netbooks. These prices reflect the high-volume prices that PC makers (e.g. Dell, Toshiba, HP) pay for each copy of Microsoft’s operating systems and are significantly lower than the retail prices consumers are familiar with.
Within Microsoft’s content on our platform, you can see how Microsoft’s stock would be impacted if Windows Pricing for PC Makers declined faster than the Trefis forecast due to higher adoption of netbooks and continued price cutting by Microsoft to counter Linux.
