Microsoft Netbook Headache May Persist as Buyers Won’t Trade Up

Microsoft Corp., already suffering from netbook makers using older and cheaper versions of Windows, probably won’t find a remedy with Windows 7.

Microsoft is planning to offer several editions of Windows 7 for netbooks, scaled-down laptops that cost less than $500. Microsoft wants consumers to opt for the more expensive versions of the software, an approach analysts and even Microsoft partner Intel Corp. say may be a hard sell.

“That upgrade’s going to be tough for a bunch of reasons,” Intel Chief Executive Officer Paul Otellini said at an investor conference in San Francisco last week. “Microsoft has to figure out: What’s their strategy?”

At stake for Microsoft is sales growth for Windows, which accounts for 28 percent of the company’s $60.4 billion in annual revenue and is the most profitable business. Netbooks run the older and cheaper Windows XP today. That contributed to Microsoft’s Windows revenue falling 8 percent last quarter even as netbook sales jumped 50-fold in 2008.

When netbooks shot to popularity last year, Microsoft was unprepared for the phenomenon. The most recent version of Windows -- Vista -- was too complex to run on netbooks, which have smaller screens, less memory and lower-powered chips than regular laptops. Microsoft had to resort to selling the previous version, Windows XP.

This time, as Microsoft readies Windows 7, the company is planning a basic version, as well as more expensive editions that are also targeted at netbooks. Microsoft CEO Steve Ballmer said last week that he will make sure consumers can “trade up.”

‘Pessimistic’

Many netbook buyers won’t go for it, because they want the cheapest option possible, said John DiFucci, the JPMorgan Chase & Co. analyst who asked the question that prompted Ballmer’s comment. That means investors shouldn’t expect Microsoft to make much more money on netbook software, the New York-based analyst said in a note to clients. Microsoft hasn’t released specific prices for the different versions of Windows 7.

“I don’t know that there’s much room to charge more than what’s been charged currently,” said Michael Cherry, an analyst at Directions on Microsoft in Kirkland, Washington. “I’m pessimistic about this.”

Microsoft, based in Redmond, Washington, rose 9 cents to $15.88 yesterday in Nasdaq Stock Market trading. Santa Clara, California-based Intel lost 3 cents to $12.28.

“The challenge for us clearly is to get the average selling price up,” Microsoft Chief Financial Officer Chris Liddell said last week. “We see Windows 7 at as an opportunity. We’ll have the ability for people to trade up, which would give us a price more similar to what we would normally get for a consumer.”

Limited Features

To push customers to pricier versions of Windows 7, Microsoft is limiting the features of the cheaper edition. The most basic, called Starter Edition, can only run three programs at a time.

Microsoft will make it easy for consumers to quickly upgrade to more advanced versions, as all the required software will already be installed on the machine and it just takes a few minutes to switch from one version to the next, said Parri Munsell, a director at Microsoft’s Windows business.

“If you look at Starter Edition, I really don’t think Microsoft wants to sell that at all -- it’s pretty crippled,” said Michael Silver, an analyst at Stamford, Connecticut-based Gartner Inc. “It’s really there just so they can say they have a really low-priced offering.”

Netbook Success

Companies across the PC industry are grappling with the success of netbooks. Netbook sales increased to 10.2 million last year from less than 200,000 in 2007, according to researcher IDC. Sales will almost double to 21 million units this year, Gartner said this week.

Sarah Friar, an analyst at Goldman Sachs Group Inc. in San Francisco, said offering several versions of Windows 7 for netbooks at least means Microsoft will be able to make more money than it does now.

“Microsoft will be able to find something that lets them cream off a little more revenue than what they get from XP right now,” Friar said.