Technology

Windows 7 to Usher in Profitless Prosperity


Microsoft's forthcoming operating system could help drive profit margins for computer manufacturers to surprising new bottoms

Ultra-low prices on portable computers are nothing new, and in fact have increasingly become the norm since the debut of netbooks—small and light ultraportables that are virtually defined by their low cost. However, there are some strong reasons to believe that Microsoft's (MSFT) upcoming Windows 7 operating system, in addition to new types of Linux-based portables, could help drive profit margins for hardware manufacturers to surprising new bottoms. But is it good for the tech industry for laptops and netbooks alike to sell for fire-sale prices? And can hardware providers build healthy businesses around a new, premium-priced operating system?

"It's getting harder and harder to sell anything over $800," CNET over the weekend quoted IDC analyst Bob O'Donnell as saying about the portable computer market. The CNET article also notes that the price of an HP EliteBook 2530p business notebook in August 2008 was $1,500, while an upcoming ProBook 5310m notebook, less than inch thick and featuring a slick aluminum case, will be just $699. That new computer, and its rock-bottom price, will arrive with Windows 7 on the day that Microsoft's new operating system ships: Oct. 22.

Windows 7 has a much smaller footprint than that of Windows Vista, and is much more adept at memory handling. It's aimed squarely at the hot netbook market, where Microsoft has had problems with its profit margins, as evidenced in a 10-Q filing from last year in which the company pointed specifically to the market when explaining large revenue shortfalls:

"The decline in OEM revenue reflects an 11 percentage point decrease in the OEM premium mix to 64 percent, primarily driven by growth of licenses related to sales of netbook PCs, as well as changes in the geographic and product mixes."

New OS Likely Feeds Low-Cost PC Trend

Microsoft is clearly aware that the trend toward very low-cost portable computers isn't allowing for the kinds of revenues and high profit margins that it's used to. As PC World notes, while not all the details of Microsoft's Windows 7 pricing strategy are in place, it's inevitable that the company will have to charge a premium for the operating system, which could in turn force hardware manufacturers to have to keep the prices of their portable computers especially low by way of compensation.

Meanwhile, Dell is shipping the very first netbook, a $299 Mini 10v, with version 2.1 of the Intel-backed Moblin Linux-based operating system. Other netbooks running Moblin will soon hit the market, and Jim Zemlin, executive director of the Linux Foundation, was quoted at the recent LinuxCon conference as saying that they will arrive at very low price points. Only Apple (AAPL), it seems, is able to maintain a healthy business selling portable computers at premium prices. And Apple won't even play in the netbook market.

Still, despite the arrival of Moblin netbooks, Windows 7 will be the pace-setting operating system on new netbooks and laptops heading into the holiday season. In fact, as InfoWorld reports, it's already on one in 67 personal computers in advance of its official release, due to early availability for users with volume licenses, and it has gotten rave reviews. It's also being aggressively marketed by Microsoft.

As buyers continue to show their unwillingness to pay premium prices for portable computers, manufacturers respond to an unforgiving portable computing market and shaved margins, and Microsoft seeks to carve out whatever margins it can get for its new operating system, daunting new economics loom. In the end, we may very well see consolidation within and even exits from the portable computing manufacturing market as a result.

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