Netbook Market Challenges Windows

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Microsoft is riding high as the dominant operating system provider for so-called netbooks, but is increasingly facing challenges from old rivals in new clothes for that dominance. Can you say Linux? How about Android?

Google’s Android, some analysts and observers think, could displace Windows in one of today’s hottest markets – but it could be a tough battle for the interlopers, too.

Since nearly the inception of netbooks a couple of years ago, Microsoft (NASDAQ: MSFT) has had an apparent lock on providing the operating system for so-called netbooks. In fact, the software titan’s Windows XP has become the de facto standard on netbooks in the past year.

Netbooks are basically low-cost mini-notebook computers that are meant for light duty Internet usage and some productivity tasks. They often have chicklet-sized keys and don’t always have a hard drive, featuring instead flash memory, and can cost as little as $200.

Originally envisioned as inexpensive computers for emerging economies, they have become extremely popular in developed economies in the past year as portable Internet appliances or second or third PCs in consumers’ homes. Some corporations have also been buying them for users who don’t need full-function and more expensive to purchase and support PCs.

“In business, there are classes of users that can do their jobs with a netbook,” Dana Gardner, principal analyst at Interarbor Solutions, told InternetNews.com.

Although most early netbooks were Linux-based, many users were uncomfortable or unfamiliar with the open source system. Microsoft soon saw a marketing opportunity and jumped on the bandwagon, initially with its soon-to-be-phased-out Windows XP.

“Return rates [on Linux netbooks] were pretty high and that’s why you don’t seem them any more,” Stephen Baker, vice president for industry analysis at NPD Techworld, told InternetNews.com.

Microsoft has been vocal since last fall, however, that Windows 7 will be the operating system of choice for netbooks, once it ships later this year. Vista, because of its size and resource requirements, is not in the running.

“We’ve seen Windows on these PCs in the U.S. go from under 10 percent in unit sales during the first half of 2008 to 96 percent as of February 2009,” a Microsoft spokesperson told InternetNews.com in an e-mailed statement.

Cost Cutting is the Game

Price is an especially sensitive issue with netbooks, as profits are extremely slim. Even if Microsoft only charges an estimated $20 to $25 per copy of Windows XP to netbook makers, that still takes a significant bite out of netbook makers’ profits.

“The average selling price of a netbook [in February] was $317,” NPD’s Baker said. “Twenty-five dollars [at wholesale] can translate into a lot more at retail, especially if you’re under pressure to make the cost under $300,” he added.

Good reason, then, that PC makers are looking at options that can bring down costs and boost even meager profits.

In order to cut costs, makers of netbooks – often PC vendors – are looking hard at Google’s (NASDAQ: GOOG) Android operating system, a Linux variant that, like other open source software, is free. It was created as a smartphone system but with an eye to the future.

“The Android smartphone platform was designed from the beginning to scale downward to feature phones and upward to MID (mobile Internet devices) and netbook-style devices,” a Google spokesperson said in a statement e-mailed to InternetNews.com.

In fact, the Wall Street Journal reported this week that HP (NYSE: HPQ) and other PC OEMs are currently exploring their options for Android-based netbooks.

Android is not the only option, either, it turns out. For instance, DigiTimes reported on Monday that Novell has set up a research and development team in Taiwan to work on SUSE Linux variants for use in netbooks. Partners on the project, the report noted, are Acer, Asustek Computers, and Micro-Star International (MSI).

Requests to Novell and HP for comment were not returned by press time.

Not Set in Stone

Nothing in the technology world is ever set in stone, though, and Microsoft’s long-term survival may still be affected by the competition between ‘free versus fee.’

“Android was designed with the idea of Internet access from the start,” Gardner said, something that neither XP nor Windows 7 can boast.

Indeed, Microsoft CEO Steve Ballmer told financial analysts in late February that, while Microsoft sees big opportunities in netbooks, it also foresees stiff competition on those machines from Android.

Baker, however, is not so sure that even big players like Google, HP, and Dell will be able to win in a market that Microsoft already seems to have in hand.

“I’m not optimistic [Android netbooks] will overcome Windows … I think they are going to have an unusually hard time penetrating those markets,” Baker added. Among the reasons”Most consumers, and even geeky consumers, prefer an OS that they’re used to [i.e., Windows UI].”

This article was first published on InternetNews.com.