Monday, April 20, 2009

So Microsoft, What’s It Going to Be?

As the launch of Microsoft’s next operating system draws near, the company is facing an interesting dilemma regarding how it approaches the exploding netbook market. Signs currently suggest that Microsoft will shift to an overly defensive strategy that runs the risk of unintentionally aiding competitors.

Along many dimensions, netbooks have been a wonderful success story for Microsoft. When the small, simple, low-priced computers entered the market a couple of years ago, they almost universally used Linux-based operating systems to keep costs down.

Microsoft fought back by offering hardware manufacturers low-priced versions of its operating system. It wisely recognized that losing the low end today could mean trouble in the mainstream tomorrow. Consumers welcomed the ability to affordably access Microsoft-compatible software.

Today, some estimates suggest that close to 95 percent of sub-$500 priced computers use a Microsoft operating system.

There’s one small problem, however. Most netbooks run Windows XP, not Microsoft’s newer (and pricier) Vista operating system. XP lacks many of the features of Microsoft’s latest system, but it is smaller, faster and cheaper.

The low price point is good for consumers but less good for Microsoft — analysts suggest that Microsoft would have made up to $50 more for each netbook using Vista instead of XP. As analysts project 2009 netbook shipments will exceed 20 million, that price discrepancy adds up quickly.

However, as one Microsoft manager told BusinessWeek, “Although we make less per unit, we’re making very decent money.”

And that’s Microsoft’s dilemma. The company is gearing up to introduce its new operating system, called “Windows 7,” later this year. Early reviews suggest that Windows 7 is a marked improvement to the disappointing Vista. Of course, Microsoft hopes the improved performance translates into premium prices. But how will the quest for price premiums jibe with low-priced netbooks?

Read the rest at Scott’s Harvard Management blog, Innovation Insights.

Scott D. Anthony is managing director of Innosight Asia-Pacific.

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