Microsoft's Cheap Netbook Plan: 'Windows 7 Starter'

Microsoft (MSFT) thinks it’s found a way to compete among the cheapest computers on the market: Sell PCs dirt cheap that are deliberately crippled, and then charge users to remove Microsoft-made roadblocks.

That’s the basic idea behind the upcoming “Windows 7 Starter Edition,” coming soon to netbook computers. Under Windows 7 Starter, users will only be able to run three applications at once. Some graphical features will be disabled too.

That’s not necessarily because netbook computers are low-powered — the limitations are built into the operating system by Microsoft. Why? So people upgrade their operating system to a “full” version of Windows 7. (No word yet from Microsoft on how much an upgrade will cost.)

How Microsoft got here, in a nutshell:

  • Netbooks are the fastest growing market segment of computers and they’re cheap, with some selling for under $300
  • Among super-cheap netbook PCs, Microsoft competes with computers based on Linux, and someday perhaps the Google (GOOG) Android operating system.
  • Linux and Android computers are primitive and unfamiliar to consumers — so far. But tacking on the full cost of a Windows licence ($60) onto a $300 netbook could drive more price-conscious consumers out of the Microsoft/Windows orbit — maybe forever.
  • Microsoft gets approximately $50-$60 for a Windows Vista licence, and needs to maintain its margins. (Windows makes up more than half of Microsoft’s operating income.)

Thus, Windows 7 Starter. Instead of making PC manufacturers pass along the Windows licence cost to consumers as the company has traditionally done, Microsoft is keeping retail netbook prices low and attempting to recoup its investment in Windows 7 directly from consumers themselves.

It’s a risky strategy for Microsoft. If it works, and netbook makers adopt Windows 7 Starter, that’s good news: Microsoft will likely charge manufacturers an equal or higher licence fee than it does for Windows XP, which is the OS powering most netbooks these days. And Microsoft is still better off having people on a cheaper version of Windows 7 than XP, assuming there’s some benefit to having Windows 7 on all of the PCs you own — versus only on your main computer.

But to say customers may be annoyed is an understatement. Annoying customers is Microsoft’s plan. And if no one feels annoyed by the three-apps-only limit, no one will upgrade, and Microsoft loses potential revenue.

What remains to be seen is whether netbook manufacturers will play ball, and lend their own brand to Windows 7 Starter computers. Companies like HP (HPQ) are increasingly exploring Android, and netbook giant Acer is hinting to the WSJ it may shun Windows 7 like it shunned Vista, and stick it out with fast and functional Windows XP for years to come.

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