Microsoft's Windows 7 Starter Edition, targeted at the hot netbook market, can only run 3 programs at once. Some are saying that Microsoft is purposefully crippling the functionality of the basic version to force customers to upgrade. Microsoft admits that its relying on customer upgrades in the netbook market to maintain its profits. Will this strategy work for it?   (Source: PopGadget)
With Windows 7 Microsoft is releasing cheap versions of its OS for netbooks, but faces the challenge of getting customers to buy pricier versions

Microsoft's Windows 7 is the apple of many in tech community's eye, with even former Microsoft critics eager to get their hands on the hot new OS which arrives later this year.  In response to the growing netbook market, Microsoft is set to release slimmed versions of the OS which can install on netbooks.  And while these versions are likely to make netbook owners day, they represent a challenge for Microsoft as it will likely to sell the base price at cheaper rates than standard OS's to keep its Linux netbook competitors at bay.  In order to maintain its bottom line, Microsoft is relying on a risky strategy -- counting on customers trading up to more expensive version.

Microsoft Chief Financial Officer Chris Liddell describes this challenge, stating, "The challenge for us clearly is to get the average selling price up.  We see Windows 7 at as an opportunity. We’ll have the ability for people to trade up, which would give us a price more similar to what we would normally get for a consumer."

Paul Otellini, Chief Executive of Intel, a key player in the netbook industry, believes that Microsoft's strategy is a dangerous one.  He states, "That upgrade’s going to be tough for a bunch of reasons.  Microsoft has to figure out: What’s their strategy?"

Windows sales accounts for 28 percent of Microsoft's $60.4B USD annual revenue and is the area where Microsoft sees its biggest profits.  However, netbooks are threatening that strong revenue base by demanding cheaper OS's.  Microsoft consented to sell netbook makers cheap copies of Windows XP for the time being (Windows Vista is too bulky of an OS for most netbooks), rather than lose market share.  However, ultimately it’s losing money for each customer who picks a netbook with Windows XP over a more expensive laptop or desktop with Windows Vista Home Premium.

With Windows 7, Microsoft may be trying to tempt customers to upgrade by giving them a base OS that is very much bare bones and lacks many desirable features.  Michael Silver, an analyst at Stamford, Connecticut-based Gartner Inc. states, "If you look at Starter Edition, I really don’t think Microsoft wants to sell that at all -- it’s pretty crippled.  It’s really there just so they can say they have a really low-priced offering."

The most basic version of Windows 7 , Windows Starter Edition, can only run three programs at once -- something many users will find unacceptable.

Analysts believe Microsoft's tactics will probably not work, though, and customers will just buy the crippled version and be mildly discontent or choose a competitor like a Linux netbook instead.  Michael Cherry, an analyst at Directions on Microsoft in Kirkland, Washington, states, "I don’t know that there’s much room to charge more than what’s been charged currently.  I’m pessimistic about this."

Steve Ballmer, Microsoft CEO, is pushing his company to work to make upgrades more attractive.  For Windows 7, Microsoft looks to make upgrades a much easier process.  Switching version will take only minutes as most of the core software will stay the same, only certain features will be unlocked based on the version.

Thus far, Microsoft has released no concrete information on the pricing of its different Windows 7 versions.

Despite the general sentiment that Microsoft's move to limit the functionality in its base OS for netbooks is a bad idea, there are some analysts who think that the move could pay off in the short term.  States Sarah Friar, an analyst at Goldman Sachs Group Inc. in San Francisco, "Microsoft will be able to find something that lets them cream off a little more revenue than what they get from XP right now."

“So far we have not seen a single Android device that does not infringe on our patents." -- Microsoft General Counsel Brad Smith

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