Microsoft Pushing Windows for Premium Laptops, Despite Netbook Rise

Microsoft saw weakness in PC shipments drive down its Windows revenue in the previous quarter, even as mini-notebooks, known popularly as "netbooks," continued their rapid growth in the marketplace. However, Microsoft could be reluctant to embrace the netbook market due to lower margins.

Microsoft announced that it was feeling the global economic pain and facing its first year-over-year decline in quarterly revenue. Much of the damage was due to declining PC shipments, where the only bright spot has been mini-notebooks, also known as "netbooks," sales.

However, Microsoft seems reluctant to embrace netbooks as a potential business strategy.

For the fiscal third quarter, which ended March 31, Microsoft's revenue decreased 6.5 percent year-over-year, to $13.65 billion. Microsoft announced its quarterly earnings April 23.

"In the client business, PC shipments remained the primary driver of revenue, and we expect traditional PC shipments, excluding netbooks, to remain weak," Chris Liddell, CFO of Microsoft, said during the April 23 earnings call.

Netbook sales, the company noted, remain strong.

"The small notebook PCs or netbook category in the market continued its growth and represented about [10 percent] of the total PC shipments for the quarter," Bill Koefoed, general manager of investor relations for Microsoft, said during the earnings call. "Unit sales in the consumer segment of the market benefited from the growth in the netbook category and were about flat year-over-year."

The rise of netbooks presents a potential issue for Microsoft, as the Redmond giant's margins for operating systems shipped with the ultra-portable units are in all likelihood smaller than with traditional PCs. Notwithstanding rumors that Microsoft has been testing the upcoming Windows 7 to run on netbooks, however, the company seems dedicated to staying its traditional course.
"From everything I've heard, they've been looking at the higher-margins market," said John Spooner, an analyst with Technology Business Research (TBR), during an interview. "It's very much about trying to push the market in the way that Microsoft wants it to go."

"Intel has the same issue," Spooner said. "They want to push the overall market towards their premium market, for both customers and the enterprise."

The key towards angling the market in that direction, Spooner added, was using a combination of marketing dollars, advertising and pricing strategies, and discounts. Where Microsoft and Intel seemed to diverge, however, is in how fast the PC market will rebound. While Intel CEO Paul Otellini said earlier this month that PC sales had hit their bottom in the first quarter of 2009, Microsoft did not offer the same reassurances during its earnings call.

Despite the focus on higher-margin markets, Microsoft's products have already penetrated the netbook market.

Microsoft asserted earlier in April that some 96 percent of netbooks run a version of Windows rather than Linux. In an April 6 corporate blog posting, Windows communications manager Brandon LeBlanc quoted data from research company NPD Group's Retail Tracking Service showing that Windows-equipped netbooks jumped from under 10 percent of the market in the first half of 2008 to 96 percent in February 2009.

The study defined netbooks as systems with a 10.2-inch or smaller screen that retail for $500. LeBlanc also cited a British retailer who said the customer return rate for Linux-installed netbooks was 20 percent higher than for Windows-equipped netbooks.

Some analysts and industry leaders argue that fears that netbooks will cannibalize the market for more-expensive PCs are decidedly overblown; however, other pundits feel that netbooks represent a decided market threat to particular classes of notebooks.

"Mini-notebooks continued to put pressure on low-priced mobile PCs," Mikako Kitagawa, an analyst with Gartner, said in a statement tied to a Gartner study of first-quarter PC shipment data. "This pressure was mainly felt in the consumer market, but it expanded into select professional markets as well, including the education segment."

Future quarters, and the release of Windows 7, will show whether Microsoft decides that lower margins may be worth embracing netbooks more fully.