Uncritical Mass

We have touched the Linux supremacy before on this blog. As well as the fact that low cost (<$400) devices will naturally be Linux based. But I think it goes without saying a little refresher never hurts. But instead of me going on lets let someone else provide a view on this shift of fortunes –

The truly deadly news, however, is at the end of the article:

Equipping Linux on a computer costs about $5, compared with $40 to $50 for XP and about $100 for Vista, according to estimates by Jenny Lai, a Taipei-based analyst at CLSA Ltd. [...] “The engineers designing computers understand that if they want to cut costs, the only way to do so is to get rid of Microsoft,” IDC’s Chang said.

When even financial analysts are figuring this out, you can bet Microsoft is already in deep trouble.

Among other things, it is effectively certain that the netbook makers have already used the threat of Linux to bargain Microsoft down to price parity with Linux, though each one doubtless has a signed-in blood agreement not to discuss it in public and the price drop may be disguised as bulk discounts or rebates for marketing support. The initial threat to Redmond’s monopoly from Linux-only products put Microsoft’s nuts in a vise; there is no way the netbook makers, operating on the tight margins they do, would miss the opportunity to extract equally favorable terms of business.

This means that Microsoft’s per-sale revenue on netbook XP licenses has probably dropped by at least a factor of 10 relative to what it makes on PCs. That’s a hell of a margin hit, and as netbooks displace a larger slice of traditional PC sales it’s going to get worse. And we can count on that happening; what we’re seeing here is a classic disruption-from-below of the PC market, just as PCs disrupted workstations and minis in the early 1990s.

There’s another problem. Vista is so dead that Microsoft is already touting its successor “System 7″. Not end-of-lifing XP on schedule means they’ll actually have to support three different operating systems for at least the years until System 7 ships, and some time afterward. Even Microsoft is going to feel the strain, and ISVs are likely to play safe by writing to the minimum (XP) specification.

Netbooks also put Microsoft in a strategic bind about its future product direction. For System 7 to be lean enough to run on netbooks, it will have to give up backward compatibility with Vista and many of Vista’s features. That means that at the same time Microsoft’s profit margins are being hammered, it will lose a significant portion of its application base.

Fundamentally, what’s going on here is that Microsoft, long used to effective monopoly and to the profit margins and strategic maneuvering room monopoly brings, is losing all three of those. Microsoft is no longer a price-maker; the hardware manufacturers hold the whip hand now, and all they have to do to beat Redmond into making ever less money per sale is to push Linux harder.

[Emphasis mine.]

Is the landscape that grim for Microsoft and that rosy for Linux? I don’t think so. NetTops are the reason why I think this which I will get to in a minute.

If as Mr. Raymond opines that Microsoft is no longer the price maker, then the situation does shift. If Redmond is forced to a price follower strategy then its margins are indeed in trouble — Permanently. No corporation can compete against almost free R&D, a minuscule percentage of labor to make the build and almost $0 for distribution, long term.

So I have to wonder, is Dell trying to make a sale or are they testing the waters to see what Redmond’s reactions are to the advert comparisons between Windows and Linux? Link. If they are and Dell can elbow the room to place Linux based product on par with Windows SKU’s without incurring litigiousness retaliation from Microsoft then the jig is finally up for The Monopoly.

Could Microsoft hack it? Indeed I think it can. Not all their income streams are tied to the OS. Office, Exchange, MSSQL are dominant entries in the application arena. I have said it before, Microsoft should abandon the OS space long term by adopting Linux. Concentrate on developing a X11 windows manager that is look and feel ‘Windows’. Then port their application base to support Linux.

Not all is sweetness in that move. Microsoft would have to compete against the likes of Firefox, Open Office and MySQL. They would also have to restructure to live on a much smaller income stream. At $300 for MS Office Pro there would not be many takers. At a $75 price point, even for Linux users, the take rate would be pretty high.

Should we worry about that happening? Probably not. Microsoft has two strikes. 1) Matter of arrogance/pride in their corporate culture. 2) Little issue of NIH. Microsoft has come around to wanting to flip burgers with the rest of us as it is to their advantage. But when it comes to fulfillment, Microsoft is always a special order and wants it their way.

Lets return to the NetTops. This is a market segment that Linux pioneered. But after a year the OS split is 70/30 Windows to Linux. A clear indication that user preference is Windows. Now I don’t view that as a grim statistic. Far from it.

Linux fights a user acceptance problem. Much of the world was weaned on Windows. The relearning curve is high in relation to the $50 you save on a Linux based NetTop. That there are benefits to that choice are not readily apparent and not recouped till six months or a year later. But even, a 30% rate competing against the Gorilla in the room is not to be dismissed. It is a better track record than any other competitor to date. Even Novell who was once a king of the hill but lost to Redmond.

There is also the issue of return rates that many allude to. The claim of course being that Linux is being rejected wholesale in its own niche. Well dig a little deeper and you find that Windows is as well. The problem is not the selection of OS but the form factor and expectations of the end user. The makers and resellers are pitching these machines as cheap laptops. To a certain extent they are at least in what is possible. The reality is quite different.

Machines like the eePC and MSI Wind are Internet Terminals with local storage capabilities. The use of SSD storage, most in the 2-8Gb range, will preclude the full use of say MS Office Ultimate. It just won’t fit. The proper use of these devices is with the Internet Cloud. Rather than shoe horning Open Office on the poor eePC the user should be using Google Docs or Zoho Suite. The limited amount of storage used to keep local copies of documents as needed. Alas the poor buyer is not being informed of this so they have visions of functionality to that of a HP Pavilion with just a smaller screen. Hence the return rates.

Bottom line. Yes Redmond has as Raymond states “… its nuts in a vice.” if it continues its same old habits. If I knew that would be their only mindset, aka Ballmer, then I would sell their stock short and watch the slide. They will adapt, I believe, but it will be long and painful. Linux will expand. But it has to improve at the application layer. That is why I think KDE has a tactical edge. The K Desktop has the integrated feel that many experience in the Windows environment. Unlike Gnome that seems to be wrapper for a sampler pack.

Linky.