As Microsoft prepares to announce its third-quarter earnings on Thursday, it’s likely that net income will be down like last quarter, partly driven by the diminished profits the company gets from sales of Windows XP as a netbook operating system.
That’s not likely to change soon, partly due to the increasing popularity of netbooks — small, low-cost notebook PC fit chiefly for light-duty computing, Web surfing, and e-mail. They also bear a smaller price tag than regular laptops, often $300 or less.
The problem? Microsoft (NASDAQ: MSFT) can’t charge netbook makers as much as it does for Windows Vista because the operating system of choice is the nearly eight-year-old Windows XP. Vista just has too large a resource footprint to run on most netbooks.
That is not true about the upcoming Windows 7, however.
With Windows 7’s launch only months away, Microsoft is planning to replace XP on netbooks with one of two Windows 7 offerings — Windows 7 Starter edition or Windows 7 Home Premium. However, even after Windows 7 ships, the software giant will be constrained by the market as to how much it can charge for netbook operating systems.
In fact, the Wall Street Journal reported this week that Microsoft is only getting $15 per copy of XP sold with netbooks — or less. While the company does not disclose how much it gets from PC makers per operating system unit sold, the Journal reported that it’s widely believed that the cost for full-blown units of Windows Vista is far greater: as much as $50 or $60.
Microsoft spokespeople declined to discuss OEM pricing for Windows 7 or XP.
So while Microsoft continues capitalizing on explosive sales of netbooks — a market that it quickly came to dominate in the year and a half or so since the netbook phenomenon began — it’s might be selling more units but at a cost to its bottom line.
In the previous quarter, for instance, Microsoft reported net income down 11 percent year over year and client revenues down 8 percent. The reason? Along with PC market weakness, the decline resulted from “a continued shift to lower-priced netbooks,” Microsoft said in statement at the time.
How much continued sales of netbooks will impact Microsoft’s sales and earnings remains to be seen. Although there are other factors impacting the tech economy, the drop in prices for computers in general has affected consumers’ perceptions of what a new laptop or desktop should cost.
“That changes the consumers’ expectations of what they should pay for a PC,” Richard Shim, research manager at IDC, told InternetNews.com.
IDC’s preliminary numbers show that 9.9 million netbooks were sold during 2008, and the research firm predicts another 18.9 million units will ship in 2009. Meanwhile, overall sales of PCs, including netbooks, dropped from 68.4 million units in the first calendar quarter of 2008 to 63.5 million in the first quarter of 2009.
Microsoft hopes to change that equation, at least somewhat, later this year when it ships Windows 7. InternetNews.com reported over the weekend that Windows 7 has begun limited “Release Candidate,” or RC, testing — the final test release before a Microsoft operating system is “Released to Manufacturing.”
For netbooks, Microsoft plans a stripped-down edition called Windows 7 Starter edition. However, there will also be other options for those who are willing to spend more.
“Small notebook PCs [netbooks] can run any version of Windows 7. For OEMs that build lower-cost small notebook PCs, Windows 7 Starter will now be available in developed markets,” a Microsoft spokesperson said in an e-mail to InternetNews.com.
Of course, Microsoft has ways to encourage customers to get Home Premium. For instance, Windows 7 Starter edition will only support three applications running at once, the spokesperson confirmed.
“For the most enhanced, full-functioning Windows experience on small notebook PCs, however, consumers will want to go with Windows 7 Home Premium, which provides unified entertainment, easy connectivity with other PCs and devices and a visually rich desktop that makes using your PC simple, yet robust,” the spokesperson added.
That may not be as bad as it sounds, according to one analyst.
“The three app restriction limits [Starter edition], and that’s their intention,” Shim said. “It depends on how the OEMs market it, [because] Windows 7 will be fairly easy to upgrade,” he added.
The question, of course, is whether customers will bite.
Microsoft will report its fiscal third-quarter 2009 revenues and earnings on April 23, after the U.S. stock markets close.