Last week I read a post by Computerworld blogger Preston Gralla that made me stop and go “huh”? Gralla says Linux on Netbooks are killing Microsoft. According to Preston, Netbook sales are driving Microsoft to layoff employees because Microsoft is losing margin.
While there may be some truth to the fact that Linux is gaining an edge in the Netbook market, it is hardly killing Microsoft, whose revenue is not driven by the operating system alone. In additon, while Microsoft is losing margin, it can hardly claim that the company is tanking because of the netbook market alone.
Where did Gralla get the data to base these assumptions on? From hard numbers? from industry analysts? No. He based a lot of it on conjecture, mostly from those who commented on a previous blog post on a related topic and he admitted as much in his post. He reasoned it out himself, saying such things as “Microsoft most likely gets less for each copy of Windows sold on a netbook than it does on a desktop machine”, “Microsoft probably gets less for XP than it does for Vista” and “Microsoft will likely continue to be paid less for Windows 7 on a netbook than on a more powerful PC”.
Most likely? Probably? Will Likely? Seriously, Preston, did you research any of this before you posted?
First, let’s look at the facts.
“Microsoft most likely gets less for each copy of Windows sold on a netbook than it does on a desktop machine.”
That is purely a guess on your part, and while there is some truth to the conjecture, it doesn’t mean Microsoft is losing money. Here’s why:
1. Fact – Although Microsoft lists pricing of OEM licenses for system builders, Redmond does not advertise or discuss pricing for Tier 1 royalty OEMs. It is generally private between Microsoft and that royalty OEM account. Netbook manufacturers are royalty OEMs, not lower tier system builders, so they do get a big break on the price while the system builder pays whatever price is set for those licenses through the channel.
However, although the royalty licensing is considerably less, its still not free, so those OEMs do indeed pay for those licenses and Microsoft does indeed make their money.
2. Fact – Microsoft is a business, not a charity. They give breaks to their Tier 1 OEMs, but they do not operate at a loss. They still build their margin into it. They are still making money.
Bottom line: Yes, this is a true statement. However it insinuates that Microsoft is LOSING money selling Windows on netbooks and making it on desktops, which is totally untrue. The Netbooks licenses still sold at nice markup and a fair profit. They just make a much larger markup on the desktops and, as some system builders may confide, more than fair.
“Microsoft probably gets less for XP than it does for Vista”?
This one made me laugh.
3. Fact – Windows XP is currently being installed or rolled back onto PCs at an estimated rate of 3 to 1. Bad for Vista? Yes, it is. Bad for Microsoft? Yes and No. Yes in terms of Microsoft’s ROI in Vista, no in terms of Microsoft’s ROI in XP.
4. Fact – Windows Vista cost a lot more to develop than XP. Redmond spent over $1B developing and marketing Vista. It spent a lot less than that developing XP. Vista has been available for two years. XP has been around for about nine. In fact, it is still selling strong, in spite of the company’s attempts to take it off the market.
5. Fact – As mentioned earlier, an estimated two thirds of Vista users use their downgrade rights to migrate to XP. They are no longer running Vista, yet Microsoft still counts it as a Vista sale and not XP, since the Vista license was initially purchased.
6. Fact – Vista is priced higher than XP, which means that when a user downgrades from Vista to XP, they are actually paying MORE for XP than they would had they purchased a PC with XP instead of Vista.
Bottom line: Has Vista returned on its investment? No. Has XP? You bet, and more. Microsoft made that back years ago. given the facts, Microsoft lost money on its investment in Vista, but made its money back on XP years ago. This means that the actual cost of producing XP and bringing it to market is so minimal the margin on an XP sale is way beyond reasonable. So, while Vista could be considered a write-off in many respects, XP is like selling bottled tap water and is basically a cash cow for Microsoft.
“Microsoft will likely continue to be paid less for Windows 7 on a netbook than on a more powerful PC”?
7. Fact – A royalty OEM license, or any system builder license for a particular product or version on a netbook is the same license as the one on a laptop. Vista Whatever is Vista Whatever, Office Whatever is Office Whatever. It is the same license and basically costs the OEM the same whether it is attached to a netbook, laptop, desktop or tablet PC. It’s not the device itself that determines the price, but what the software the license is for.
Now, could Microsoft make an exception for a netbook? Of course. But in such a scenario Fact 1 applies.
8. We don’t know the pricing for Windows 7 yet, so we really can’t draw conclusions. However, Microsoft has said that Windows 7 would have at least as many versions as Windows Vista and would have similar price points.
Bottom line: With the facts given above, does it matter?
“There’s very little margin on a machine selling for $200 or $300, and so Microsoft simply can’t charge full freight for Windows on one.
Now, this one just floors me. Preston, the MSRP of a netbook has little to do with what Microsoft decides to charge for its software.
8. Fact – Microsoft doesn’t care what we sell the computer for, they aren’t selling the computer, they are selling the software that is bundled with it.
9. Fact – Microsoft may negotiate with the royalty OEMs, but at the end of the day they charge what they want and the OEM decides how low they can sell the netbook with the license installed and still make a dollar.
10. Fact – System builders generally pay in advance for licenses or blocks of them, whether they use them or not. If I buy 30 copies of Vista put ten licenses on ten PCs and installed Linux on the rest of them, Microsoft got their money. I’m just stuck with 20 licenses in inventory.
Bottom line: whether the manufacturer sells a netbook for $1 or $100, Microsoft still charges the system builder what they charge according to the OEM license agreement. Whether the vendor makes money on the resale is the vendor’s problem, not Microsoft’s.