Microsoft’s Netbook Problem

By  |  Friday, July 24, 2009 at 2:15 pm

The persisting popularity of netbooks has been a major drain on Microsoft’s Windows client licensing revenue. The worldwide economic downturn has driven many people to purchase cheaper machines, but I believe that the netbook’s ascension also reflects changing consumer tastes.

Windows client licensing revenue fell $1 billion from last year, and Microsoft’s unearned revenue from multi-year license agreements has flatlined.

Unless Windows 7 proves wildly popular, the company’s prospects for restoring its Windows business to its past luster appear to be grim. I expect that the company will experience a cyclical earnings bump that will crest near where previous Windows releases have in the past, but growth will be less substantial.

That is because there are simply too many alternatives, with the Web acting as the great equalizer. I access Gmail just as quickly on a netbook running Linux as I would on a higher end laptop powered by Windows. And even though netbook hardware is wimpy by current standards, netbooks are as powerful as high-end machines were on the not-too-distant past

Not everyone is a developer or a gamer. I believe that the netbook meets the “good enough’ threshold for most people, and there is a decent assortment to choose from on the market.

Many of those people may have been compelled to purchase a netbook by financial reasons, but it is highly possible that many will be satisfied enough  to purchase another netbook in the future. It could mean a permanent change in consumer buying behavior.

Microsoft seems to understand that, because it is downplaying netbooks at every chance it can get, and is attempting to direct customers toward more expensive alternatives. But the industry has failed to create really compelling products that would “wow’ me into paying more–so far.

I am reminded of my late grandmother, who was a child of the Great Depression. She wouldn’t spend money needlessly, and would reuse what she had (including tinfoil). People are experiencing varying degrees of hardship during this recession, and it is not unreasonable to expect that their spending habits will be permanently altered.

Consequently, if Microsoft does not see its market share slide, it will see its revenues fall. It cannot charge as much for a copy of Windows on a $400 machine than it would have traditionally done on more expensive systems. The Windows cash cow is slowly beginning to dry up.


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18 Comments For This Post

  1. drew Says:

    I think Office still has some life left in it. It is also important to note that even with the heavy decline, Microsoft still had profits of $14.1 billion for the year.

  2. Tom B Says:

    For 99% of Windows users, a netbook has enough functionality. In fact, for some– those who just want a small web device- an iPod Touch might be enough. Apple was smart to always target the professional user (scientists, artists) and the “pro-sumer” (Video, photography, audio). These people are NOT well served by netbooks.

    Fact is, if you want to spend $500 or less for a computer, it might as well be a netbook, because a full-fledged desktop PC at that price will be a POS, anyway. The gamers– many have gone over to consoles.

    I see Enterprise adopting netbooks next. Ballmer will bust a vein.

  3. David worthington Says:

    Good point. Between web services and server side virtualization, there is little need for businesses to buy expensive laptops for most workers in most verticals.

  4. TC Says:

    “most verticals”? I was with you on the consumer front, but for people to say that netbooks and web based services are good for business workers?? Gimme a break. There are zero credible options for Excel and Word. Period.

  5. drew Says:

    I am one of those in the “good enough” camp. I have a fullblown desktop at work, and I do “light” document creation in GoogleDocs. I think part of what is being missed is that for many, netbooks are not always an “either/or” choice.

    For me, the netbook was a second computer, bought for it’s lightness for use on the road. Two or three years ago, I would have spent $700 for a lowend laptop. Now I spent $300 on a netbook, and run UNR on it.

    As David points out, these are tougher economic times, and if I can save $400 and have to get along with “good enough”, than I would. For Microsoft, this is a big problem. I have been on the road, but I read/saw/heard that netbooks are now 25% of all computer sales. They are not going away, and this is going to be a long term problem for Microsoft. I have been running my netbook on UNR for three months, and have not missed XP once. While Windows 7 may be neat to see running on my netbook, that is $50 or so that keep in my pocket.

  6. Stilgar Says:

    “The Windows cash cow is slowly beginning to dry up.”

    Replace the word Windows with the word Microsoft and your set. The only product Microsoft makes that I hear people rave about any more is the Xbox 360. The best thing I’ve heard anyone say about Vista is “it’s not that bad,” and most of my friends and I think Windows 7 looks good, but have already migrated to Mac or Linux.

    It’s kind of ironic that the current generation of “I’m a PC” commercials are a slam on Apple prices, but you could easily replace Apple with a Windows-based laptop and throw netbooks into the mix. “Congratulations, you’re a Tux, and you did it all for $199.” Oops.

  7. Steve Says:

    This *should* be right, if most people had a good deal of sense. A netbook is an instance of a device who’s time has come; it simplifies greatly the workflow that most people need to use a computer for. In an ideal world, a netbook with some lite linux on it would sell like hotcakes. The reality is that Windows is still selling quite well.

    Technical computer skill is not at a widespread enough level for the netbook os. People are very much dependent on a specific model for their computer needs, and that is the MS Windows one that they’ve been familiar with since 95. Sorry to be a downer, but the truth is that lots of people are going to buy Win7.

  8. pobept Says:

    Microsoft office is over rated and over priced. I use OpenOffice, it’s free and will do everything that ms-office will do.
    My next portable non-desk top will be a netbook.
    They will do what I need to out of office and I will still have my old tried and true desk top when I need it.

  9. drew Says:

    It may be over-rated, but people are still buying it. I use both Office (at work) and OpenOffice (on my netbook) and I find by and large I can move between them smoothly. But in the enterprise, a lot of people are still buying Office, and I would think a lot are going to buy Office 10. What will be most interesting is what the web-based version of Office will look like. I have been playing with Office Live workspace, and some of it is pretty neat. In the end, cost is going to be the question.

  10. JDoors Says:

    How many people have a netbook as their “ONLY” computer? I suspect they’re often second or third computers and have little effect on the sales of Windows (though when they are sold without Windows it affects market share). Sales may be down for a lot of reasons (delayed purchases because 7 is just around the corner, for example), but I don’t believe you can attribute much of that loss to the sales of netbooks.

  11. Jane Cutainz Says:

    Netbooks may be 2nd or 3rd devices for people who already have computers, but due to the market saturation, this may be where sales are going. If netbooks don’t run windows by choice, they will naturally diminish microsofts predatory monopoly pricing structure.

    Microsoft cannot survive in a world of smaller more efficient computers. They exist on fat margins on bloated software on overpowered computers. Nothing brings a fast cpu or 2, to its knees faster than a big old operating system from microsoft.

    I own several computers and several licensed copies of windows, but lately I’ve been converting my computers to linux, and they seem to be more than adequate without the need for hardware upgrades. If others do likewise in an economic recession, retooling existing hardware to make it last and make the return on investment even longer, than Microsoft will find itself on a difficult path for the future.

  12. Bouke Timbermont Says:

    “Apple was smart to always target the professional user (scientists, artists) and the “pro-sumer” (Video, photography, audio). These people are NOT well served by netbooks.”

    Too bad they still seem to ignore one hell of a big group of the ‘pro-sumers’, namely gamers. Even with Bootcamp, you still need a Mac Pro, which is 2500$ for the standard model, and then upgrade to a GTX 285, which is 450$, to not be laughed at by other gamers. Only then you have a sufficient gaming machine (the HD4870 would ofc do, but Apple for some bizarre reason only offers the 512MB model, which is insufficient for any new game).

    But for 3000$ you can get a way better system 🙁

  13. Meh_Gerbil Says:

    I don’t buy the “economic downturn has caused people to buy cheaper machines” theory. People who are truly having economic problems would be the first to realize that nobody really needs a netbook.

    Any computer made in the last 10 years will run XP (or Linux, I don’t care which) and allow you to check your email.

    The ugly truth is that most people don’t need cell phones or WiFi connectivity – these things are toys for a bored population of narcissists that have fooled themselves into thinking other people are actually interested in “Tweet” updates every 10 minutes.

    All this noise is simply drivel from Linux/Mac fanbois who’ve been fantisizing about the fall of Microsoft for the past 15 years. It doesn’t matter to them how useless and silly the craze is (netbooks, iPhones, etc.) that brings the demise of MS about – as long as Microsoft dies, dies, dies.


    So Microsoft finally dies.
    You’ll go find some other company to hate and waste your life *Tweeting* about it.

    I can hardly wait.

  14. bOLD_CODgER Says:

    As a developer, being able to generate native code for a netbook, on the very same device, would be preferable to the usual schenanigans, of having to cross-compile from a large bulky desktop machine.

    I can’t wait to get my hands on a Netbook with an ARM Cortex A9 or A10.
    This coding nirvana that has eluded many coders for far too long. Windows CE development for the SH3 (Jornada) etc, was a PITA.

  15. Shady Bloke Says:

    I bought a netbook because I thought it would be cool to have a cheep + small laptop to take away on holidays with me.

    I do fairly heavy work and need realestate on my desktop PC, so a netbook is never going to replace it. Largley it satisfies its intended use, however I find the reality not as good as the hype at the moment (I do have a releativly old netbook mind – Eee900). I havn’t found a linux distro I am truley happy with (tried about 5 at present), and generally find myself end up putting my spare copy of xp back on it after a few months at the mo (which equally I have reservations about, but safisfies my needs the best generally).

    I think a few years of development in hardware and refined netbook linux distro’s and microsoft will have something to worry about. I found that if the release candidate of Window 7 is anything to go by, it doesn’t pose a solution to the gap in microsofts netbook portfollio *currently*. Generally I like it a lot – I am already using the 7 RC as my main OS on the desktop, but it doesn’t run at an acceptable level on my current netbook (now much a extra gig of ram and atom hyperthreading would add I don’t know). Microsoft may be hedging their bets on netbook hardware improving in power over the next year, so W7 becomes a more viable option.

    If I could make the decision again, I would actually spend a couple of hundred more and get a budget 12inch or 13 inch laptop instead, there are some brill budget options out there now in this size range. But who’s to say where netbooks will be in 2 years…

  16. Gary O'Connor Says:

    All this talk of Linux on netbooks adds up to nothing where I live.

    The local major retailer of netbooks refuses to stock netbooks with Linux because people keep bringing them back claiming they’re broken when they won’t run MSOffice.

    He claims they have never had so much trouble with any computer in their history until they started selling netbooks with Linux installed and that XP installed netbooks give him few problems.

    As far as he is concerned, if W7 is any better than XP, bring it on.

    If you live here and you want Linux on your netbook, you have to order it specifically, there are zero in stock.

  17. RB42 Says:

    I’m glad I built my websites with fluid CSS, so they look decent on smaller screens. Because that’s my problem with netbooks… the screen size. If you edit and create documentation in meetings and on the go, the size of the screen kills a netbook for usability. Plus, I really like the 16:9 form factor of my bigger Dell when surfing.

    And as far as sub $500 laptop quality goes… take another look. From what I’ve seen watching my kids use their “cheapo” toshibas versus co-workers that have the Acer or Hp netbook, the build quality and reliability is very similar.

  18. drew Says:

    My netbook (HP 1030NR) came with Windows XP, and I replaced XP with Ubuntu UNR. I was able to create a bootable USB install and I was up and running in about 20 minutes. That was back in May, I have never looked back. I agree with Gary that for Linux being sold retail, that is hard to find.

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