XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Cold Numbers of Microsoft’s Netbook/Linux Nightmare

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The Cold Numbers of Microsoft’s Netbook/Linux Nightmare

February 12th, 2009 · 34 Comments · Uncategorized


It’s no secret that Microsoft isn’t doing too well in the netbook market. There has been a lot of speculation in the blogosphere to the extent of the financial damage. We did the heavy lifting and dug up the real numbers to accurately quantify what’s going on and what it means (hint: developers are getting laid off!).

In this analysis we make the case that the rise of netbooks does not bode well for the company. For the first time, Linux is not only a real threat but is whacking MSFT’s bottom line. Long term, Microsoft’s OS business model is threatened.

This is part 1 of a two part series. This portion will cover the rise of netbooks and Linux market share. The second piece will cover XP’s cannibalization of Vista sales  and the more abstract but very real existential threat posed by netbooks. Look for it next week.

1 million: Quanity of Netbooks sold in 2007
14 Million: Quantity of Netbooks sold in 2008
8% - Estimated market share of netbooks in 2009 (UBS)
12% - Estimated market share of netbooks in 2012 (iSupply)
10% - Fall in sales of “Traditional” full-featured computers in Q4 2008

These numbers should convince anyone that Netbooks aren’t merely a fad but a megatrend. For years, experts have espoused the “cheap computing revolution”. It’s finally here, with a twist.

Remember Microeconomics 101? Wasn’t there some “law” where the sales of a good rises as the price falls? Unfortunately, consumers don’t buy two half-priced netbooks instead of one PC. The economy sucks and they’re pocketing the difference.

Instead of expanding the economic pie for everyone, the swarm of netbooks are cannibalizing the sales of full-featured computers. Every company in the PC ecosystem ignores the netbook trend at its peril. This is not good for Microsoft. Specifically because:

90% - Windows marketshare of computer market
70% - Windows marketshare of Netbooks
Source: Microsoft’s Windows chief Bill Veghte

While doing research for this article we saw various figures thrown around. We chose to report the most credible (and probably the most conservative) figures - directly from Microsoft management.

The netbook market is the perfect beachhead to mainstream users for Linux. Most consumers are using the barebone computers for internet, email and office documents. With Firefox and openoffice, Linux’s limited selection of programs is not an issue. Buyers are more cost-sensitive with value products, which maximizes Linux’s price advantage. A $50ish operating system might be insignificant when buying a $1500 desktop but is actually a sizable sum when purchasing a $250 netbook. It is less resource intensive than Windows, making it ideally suited for low powered computers. Microsoft has been forced to use Windows XP, its two year outdated OS, because Vista is too heavy.

If Linux is a guerilla army, waging war on the traditional desktop has been like fighting in the cities. The netbook jungle is where its advantages lie and its dominant competitor’s strengths neutralized. For the first time, the major manufacturers and retailers are producing, stocking and selling computers equipped with Linux.

Therefore it might come as a shock that Microsoft still controls over 2/3 of the Netbook market. But Apple so far does not have a netbook product, so Linux has a respectable 1/3 of the market. One also needs to remember that because of network effects, software by its nature is a very entrenched market. In operating systems, what is going on is unprecedented.  Apple, which has been on fire for many years with blockbuster products and is powered by an invincible marketing machine, still only controls 9% of the overall PC market. And for an open-source software comparison, it took Firefox 5 years to obtain a 20% marketshare in browsers.

This is Linux’s first time in the limelight with mainstream consumers. It’s still rough around the edges with technical/easibility issues (which is why your writer is typing this on his Windows XP Netbook). But Linux will only become a more fearsome competitor once the kinks are fixed and consumer awareness grows.

So what’s the effect on the bottom line?

Software is a great business model because selling an additional copy of software doesn’t have a significant cost. Almost all the revenue from each incremental sale goes straight to the bottom line. But the reverse is true as well. The lost revenue from the 4.2 million Netbooks not running Windows evaporated right out of Microsoft’s profit. Microsoft does not reveal the price paid by manufacturers for its old Windows XP, but it’s estimated to be less than $20 by Endpoint Technology Associates.

Some rough back-of-a-napkin calculations:

4.2 million lost sales x $18 price per copy = $75,600,000

Due to deterioating profit margins, Microsoft recently announced a huge layoff of 5,000 jobs. Lets assume that each developer has a total cost (salary, benefits, social security, etc.) of $150,000.

$75,600,000  / $150,000 per employee = ~500 developers.

Developers are the lifeblood of a software company. Microsoft’s ability to deliver innovative products is being stung by Linux in the netbook market. Unless Microsoft 7 is a hit, this trend will accelerate. Unfortunately for MSFT, Windows 7’s is based off of Vista and its cheapest version will limit users to running 3 programs at a time.

Stay in tune for the second part, due next week. In turns out that the cannibalization (damn I love that metaphor!) of Vista sales by XP is having a very real material effect because of XP’s significantly lower price. Also we will discuss the existential threat for an operating system company when operating systems become a commodity…

Sources: EasyBourse, Crave, DisplaySearch


34 Comments so far ↓

  • boomer

    It’s the year of the linux desktop again… it’s the end of microsoft yadayadayada…

    Same old, same old.

  • Alex Villanueva


    Trust me, I’m as sick of Linux fanboyism as you.

    1) I’m not saying its the end of Microsoft. It is going to be many years (if not decades) for Linux to catch up w/ MSFT in the overall PC market.

    2) The battle in the Netbook market is hurting MSFT’s bottom line. And with the recent round of layoffs, its affecting its ability to deliver innovative products as well. That’s why its different this time - the numbers are real. It’s not just hobbyists and anarchists using it, it’s the everyday consumer.

    Because of its unique dimensions (the jungle), the netbook market is a very important step for Linux’s leap into the mainstream.

  • Daci

    Linux is rough around the edges?
    I’ve used it for 4 years,seems smooth as silk to me

  • Darryl

    IF Win 7 is a winner, im using it now, have been for weeks and its great, Linux lost this game years ago, there has been chance after chance that Linux has been an epic failure in taking advantage of.

    There is only one think left for FOSS/Linux to do,

    That is fix your products, improve your products, listen to the consumer, stop trying to get the courts to do your dirty work.

    And compete in terms of quality, and function.

    You’ve tried stealing everyone elses ideas, it failed as you are always behind.

    You’ve tried reducing your price to zero, which is in itself a type of market price fixing.

    But still you are unable to give away the product.

    So you get the courts to fight your fight, and that too has failed.

    Now you just have to make a quality produc and compete in the open market like everyone else has.

    If you product sucks you go out of business, if it provides what he people are willing to pay for it, you make $20 billions a year and create some of the worlds richest people.

    You gain vast market share, and market loyality.

    MS is not perfect, but its far better than any present alternative

  • Ken D'Ambrosio

    I agree. I’ve always thought Linux *could* be a competitor on the desktop — but I don’t believe I ever said it was in a position to start coming out. [Note that, a mere 10 years ago, almost, I wrote an article at linux.com about Linux coming out -- in the server room. I believed it then, I believe it now. But that's a very different paradigm.] The old standard used to be, “Can grandma run it?” And it was a valid standard — until netbooks came along. Netbooks did a couple of things:
    1) Entirely different demographic. Suddenly, you’re selling to 15 - 30 year-olds, including — gasp! — women.
    2) Entirely different expectations. A “netbook,” by its very name, is meant to offer a different experience. This is something you surf the web with, do e-mail with, listen to MP3s with. You can (as I am this very moment) plug it in to your desktop keyboard and 20″ LCD — but that’s almost an afterthought. Netbooks are all about convenience and price.
    3) And that last bit bears repeating: price. MS has painted itself into a bit of a corner, here, and Windows 7 is their only real chance to possibly escape. What do I mean by that? Well, netbooks — again, by definition — aren’t all that powerful. They’re XP or Linux boxes. Vista just won’t do it. (That being said, Compiz’ eye candy is really nice on my Lenovo S10 — somewhat to my surprise.) And MS doesn’t make “real” money off of XP any more; it’s been largely commoditized. They’ve pushed Vista, and failed. Now they’re going for the next generation, and, clearly, they’re going to push for it to run on netbooks — but, again, they *can’t* make much money on it, and still be anywhere in the same ballpark as a Linux-based machine. Period. (Again, this was semi-true back “In the day,” but with netbooks, cost differentials are magnified. I got my Lenovo (with, alas, a now-deleted XP) for $400. It can now be had for $350 or less if you keep your eyes open. A $100 MS “tax” for Windows 7 is going to be noticed, big-time.) So, a rhetorical question: which netbook manufacturer — selling them like hotcakes — is going to want to install Windows 7, make less money, and start losing sales to competitors?

    Do I think MS is dead? No, not even close. But I do believe that netbooks have changed the playing field. And, unless MS does something dramatic, today’s consumers of netbooks will be tomorrow’s business users.


  • philc

    You have to own the low end to do well. That’s how MS got big in teh first place. PCs were the low end that ate the minicomputers and workstations.

    Microsoft will have to change its business to win netbooks. Time will tell if they can do it.

  • 34534535

    WTF?? I use Linux over 2 years now on my desktop, and I’m not hobbyist and anarchist, I’m everyday consumer! Get lost with your prejudices!

  • Wade

    The trends at the low end are really hurting MSFT including:
    1) Open Office: starting to be used by schools and governments, accepted for use by students, supported by IBM as Lotus Suite
    2) Firefox: with a very large chunk of the market and viewed by most as the safer browser alternative.
    3) Linux on netbooks: less cost, faster, hackable
    4) Linux on phones: Android and others

    This is only a partial list but exemplifies a growing trend. Many strong forces are united against MSFT and their monopoly. Change is coming….

  • IGnatius T Foobar

    Commoditization is inevitable and irresistible. Microsoft’s cash cow cannot last forever. The only reason it has lasted this long is because of the network effect. That’s going to take a long time to erode, but it has to happen eventually. Netbooks are beginning to look like the right set of circumstances (super low end hardware with extreme price sensitivity, being sold at a time when consumers are more cost conscious than ever) for that to accelerate a bit.

  • That guy owes me money

    This sure is bad for Microsoft, but it’s good for just about everybody else. Monocultures lead to Vista, expense, and bloat. Actually having to compete for once might just make them work harder. That will cause the free software guys to work harder still trying to better them. Creativity and progress abound, and we, the users, benefit.

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  • Mike Cooper

    Wow, you really sucked the air out of your article when you mentioned you were writing it on a Windows XP netbook!

    I don’t see any word processing features in your article more advanced than a few bold phrases. And Linux-based netbooks weren’t up to the task huh?

    I’m all for competition but I’m not about to put my money where your mouth is. Get back to me when Linux is good enough for you to actually use.

  • Rich

    I don’t see how you could possibly be right. You cannot sustain any kind of business model by giving away everything for free (communism already failed once). From everything I have heard, Linux is an absolutely terrible system for everything people try to use it for.

    So forgive me if I plan to hold on to my Microsoft shares for a while longer. And quite frankly, in an economic depression such as this, we should all be buying American, not encouraging people to use software written by god-knows-who.

  • James

    Part of the problem is that windows activation is truly working. Now people can’t install a working version of windows on a system are starting to give ubuntu etc.. a real chance.

    I think Bill once said something like, “They’ll get addicted, and then we’ll collect”.

    Most consumers prefer windows because it runs their applications. They only truly need windows 5-10% of the time. Thanks to short sighted policy from m$ users are learning this.

  • machiner

    Naw — like Ubuntu being the representative for Linux to the madding crowd, thereby tainting the reputation of Linux, the Xandros (and others) version of Linux installed on netbooks will act similarly.

    If the manufacturers and marketers were smarter a Linux distribution like Debian would be used instead.

    This whole market segment is suspect to me.

  • Jaffa

    Exponential growth, anyone? If you go from 100 to 110 users in one year, and trends stay content, you eventually go from 10,000 to 11,000 users in a 12-month period somewhere down the line.

    “This will be the year of…” is a dumb expression which ignores the fact that THERE IS NO THRESHOLD by which reaching you can say that Linux (or anyone else) conquered the market.

    EVERY year is the Year of the Linux XYZ, every single year there is growth.

    And it’s exponential.

    (And it’s ever more attractive now that the economy’s shattered…)

  • Reformer

    Microsoft loses 3 ways with Linux netbooks:

    First, as the article points out they lose revenue by lost license sales to Linux. The article estimates this at 30% * 14 million * $18 Windows netbook license, which comes to about $75M.

    Second, (and the article misses this entirely) there is revenue lost due to having to sell XP vs Vista on Windows netbooks. If the OEM cost of Vista is $30, and XP is $18, then M$ is losing $12 per Windows netbook. This amounts to 70% * 14 million * $12, which comes to about $118M. This is an even greater loss than due to losing 30% marketshare to Linux.

    Third, there is the increased awareness of the viability of Linux on PCs. As consumers use Linux on netbooks, they will consider using it on regular desktops and laptops. The financial impact of this to M$ is hard to quantify, but has the potential of being greater than the previous two combined.

  • H G Masters

    This is a much bigger issue than just losing a few OS sales.

    If the user base finds that Linux and the “no additional cost” applications do what they want on a netbook, they just might start asking the OEMs to install Linux on their full size notebooks and desktops as well.

    That is what MSFT is worried about. This will start to erode their application sales as well as OS installs, and it might not take as long as you would believe.

    Microsoft needs to listen to the feedback from the consumer. The sales figures tell it all. If small low priced computing equipment is selling, they need to be able to effectively support that equipment with small, low powered OS and apps. Yes, they are going to cost less, so the profits of bygone days may be behind them.

    Remember how Microsoft managed to overpower Novell in the network market? Lower price per seat. Superior performance or better security had nothing to do with it, because they could not compete there. They just plain bought their way in.

  • TripleII

    @Mike Cooper.
    Linux netbooks are great. Linpus Linux, modified Xandros, the new HP MEI, all are truly the first time a full computer is usable, really and truly turn key for anyone. That said, I used the Linpus linux OS for 15 minutes then said “Pretty cool, newbies will love it” then installed Mandriva 2009 on my Acer Aspire One (as I write this).

    It works great, fast, super eye candy and I have sold 4 for Acer just by using it, however, I did have to go the effort to install it. (Trivial for me, been Linux only for 10 years now). So, for a tech writer or Geek, if you don’t want to take the time, XP is more flexible (and harder, less secure) out of the box than Linpus is, so I don’t see the foul here.

    Soon enough, and I believe the MEI does this, advanced users can toggle from the turn key interface into a stock Ubuntu desktop and poof, you have the best of both worlds. Mandriva’s new netbook offering is said to work the same. So, until Linux gains enough momentum to be choose a) Easy Mode b) Advanced user mode, I can’t fault anyone for wanting the more powerful default mode.

  • TripleII

    Good one, throw out FUD and then protectionism.
    “From what you have read…”. How about the 50+ users who I converted to Linux (I refuse to support Windows, it just wastes too much time). Try it before you FUD it.

    Buy American. I do, always have, but MS stifles the North American market. All that money is shuffled up the pipeline to a very few individuals. How is one American company making 75-90% margins better than 25 American companies making 7-10% margins.

    IBM, Redhat, Oracle…. Also, if companies all over America pay less for their software, they are more able to keep/hire people, or even just stay afloat. As MS loses it’s grip on collecting all this money, the computer industry as a whole is now thriving in terms of innovation, choice, etc. From mobile to embedded to Web 2.0 to netbooks, MS is pioneering none of this, and the ecosystem is starting to thrive despite MS, not because of it. When MS stops fighting the unwinnable battle to regain control over all computing (which it had in the late 90s) and embraces the change and truly just competes, the marketplace will be even that more exciting. Margin erosion and competition can’t bring this change about quick enough.

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  • dbmuse

    its not about windows… vs linux. its about communicating… netbooks are big pda or really big cell phones. Linux can do that very well. Its not the OS. Its browsing, portability, fast enough and the last spot where windows really sucks…. is it virus safe. Running a virus scanner is not virus safe.

  • SMP

    Microsoft’s loss in revenue would indicate that Windows is not being given away on netbooks at less $15. With such a large dent in Microsoft’s balance sheet, the only logical conclusion is that Microsoft is actually paying OEMs to put Windows on netbooks. This can be done by using tied in advertising and other rebates on Windows (not necessarily all on netbooks) in excess of the $15 nominal license charge.

    Contrary to what some have suggested that Linux can’t be given away free, it seems that Microsoft has to pay OEMs to put Windows on netbooks in order to keep Linux from taking over the netbook market, and so prevent customers experiencing a Linux OS on the desktop that they may actually like more than Windows.

  • Maternitus

    Using Linux consequently for over seven years now, I must say that it never gave me any problems. Not with my budget or with any crashes. The software bundled with it, an office suite, image editor, html editor, browser and email never let me down. Expanding my arts I started also to use 3D software and audio edting tools and, guess what, that also gave me the things I needed. For free. Reliable.

    Maybe I sound as a Linux fanboy, but I am not. I am an artist and writer that tries to make some living in this world and thanks to Linux it is possible. If Windows came that cheap and fully bundled with tools I might use that, but hell, I don’t.

    With all the safety problems, like virusses and trojans, I am not likely to switch at any given day to Microsoft products. It hurts my trade and even interest in computers, because when such a thing occurs on a machine (read well: machine, a piece of equipment that should function when I press the “on” button) I see the machine as unreliable, but that is seemingly wrong. It is the stuff that runs that machine.

    And with my Fedora on the laptop and Mandriva on the main production machine all things are done smoothly and without crashes. I hope to add many years more in using the software and those numbers in the statistics will change over time, when more and more people will discover the fact that they will pay way more than just the Microsoft tax or price for that (sorry excuse for an) operating system, spending time on cleaning and maintaining and, let’s not forget, spend alot of money on the software they need.


  • Antton

    But does folk think about a single cent about 3 application limit of Windows 7? I’m afraid NO. Just like Carla Schroder wrote, Windows has made it clear that people are indeed too stupid 4 computers. This is what we have seen during the last two decades.

  • Darren Bell

    Has anyone thought about this:

    All those XP netbooks that are lying about. What happens when the average user wants to upgrade?

    I’ve just read that there is no in-place upgrade from XP to Win7 !!!!

    So, will the average consumer who has heard of this Linux thing, grab a Live CD and try it?

    Could be a few more MS licenses lost me thinks.

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  • nitrofurano

    Finally the long waited Linux OEM came with netbooks, and hopefully finding on sale everything else netbooks with Linux OEM will be easier as well, since customers will be more demanding of asking why paying expensivelly for ms-Windows OEM which they are using less and less, and Linux is showing being so evidently bright where ms-Windows fails deeply. This can be really an end for Microsoft, finally, for the customers fairness! Thanks God!

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  • zambithegreat

    Yet another linux fanboy blog predicting the demise of Windoze in spite of all evidence indicating the contrary? Within one year linux has gone from 100% netbook market share to 30% and its spun by fanboys as a good thing for linux?
    BTW HP says they are not offering linux anymore on their new models.

    Linux will ALWAYS lose to Windoze in the consumer market because it has no support from commercial SW application vendors. The commercial SW guys demand a standard platform and linux has too many distros. Who is going to provide tech support for 5-10 different linux distros? Fedora, Ubuntu, Gentoo, … and the various variants of each of these. Does not make business sense. And consumers ONLY care about the apps not the underlying OS. Only geeks and hackers care about underlying OS. I know become I’m a linux geek but I’m also business savy unlike the other delusional linux fanboy breathen. MS owns the PC market my friends!!! Better to focus on linux in smartphone market. But again same problem .. too many linux distros/SDKs. Pick one and the SW vendors will support it.

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  • km4hr

    I hope Windows never goes away. I’ve been a full-time Linux user for 10 years. I’ve never bought a new PC. I just wait for my Windows friends to give me their old PC when it comes time for a OS upgrade. I always have more PC’s than I need. Long live Windows, I say.

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