The Netbook Windfall

Joe Wein covers Windows 7 versus Linux on netbooks. "Does it really matter to Microsoft shareholders and employees if the 21 million or so netbooks expected to be sold this year (and the even bigger numbers in 2010) will be running some version of Windows or a version of Linux (which is free), if previously those buyers would have picked up a more powerful machine that netted Microsoft $40-$100 per license?"

Don Marti offers his insights into the Netbook and the Linux combination.

In the past, Microsoft has been able to push upgrades into the market. Today, though, with hardware vendors able to hold out the threat of going Linux, the company has to continue to offer an old OS version at a lower price.

Just the existence of desktop Linux—a second source for the OS, as PC builders have a second source for everything else—means a shift of negotiating power. There's still a lot of network value in a copy of Microsoft Windows because of all the compatible products out there. But, thanks to hard-working Linux driver writers, "driverless" USB class-compliant devices, and the rise of web-based applications to take the place of shrink-wrapped Win32 applications, the difference in network value is less and less at the low end of the market. There's a higher difference in Windows and Linux network value when you move up from a basic web browsing, word processing machine to either content creation (where more of the leading applications aren't out for Linux) or small business (where customers want Windows-only vertical apps and Intuit QuickBooks.)

So today, the negotiating power that PC builders get from the threat of desktop Linux is only at the low end. Jim Zemlin at the Linux Foundation goes straight to the source: a Microsoft earnings report. "Client revenue declined 8% as a result of PC market weakness and a continued shift to lower priced netbooks." Even stuck at the low end, desktop Linux is making Microsoft's product cheaper. Steven J. Vaughan-Nichols writes, "Well, I think Microsoft is offering some very sweet deals to the OEMs to make sure that XP gets a lot of play."

Marc Fleury asks, Is EEE killing the PC industry? "Neither Intel nor Microsoft are structured to address the market of $200 PC, or are they?"

But, since the PC builders have more negotiating power at the low end, they'll be making more profit there, while Microsoft's profits concentrate on the high end. You can use a web site or watch a movie on a netbook, but you can't build a web site or edit a movie on a netbook. People who actually make things on their computers will always buy machines at a more profitable level of badassitude. Right now, though, because of the supported OS list from Adobe and Intuit, Linux for the home and SOHO market is pretty much stuck on the less-profitable netbooks.

The main focus for Microsoft's director of open source desktop strategy is going to have to be something like "people who can afford Camrys don't drive Corollas." Upsell netbook users to "real" PCs. Here's one way. Jakob Nielsen writes, "Big monitors are the easiest way to increase white-collar productivity, and anyone who makes at least $50,000 per year ought to have at least 1600x1200 screen resolution. A flat-panel display with this resolution currently costs less than $500. So, as long as the bigger display increases productivity by at least 0.5%, you'll recover the investment in less than a year." A low-end PC won't drive that big display, so low-end PCs won't displace more profitable machines for serious bean-counting or pixel-pushing. Nobody's cash cow is in serious danger.

But if you think about it, this whole situation is seriously weird.

It's nice for Asus and other netbook vendors, but other companies prepared the feast that the netbook makers are eating. Sun spent millions acquiring StarDivision, and millions more turning StarOffice into OpenOffice. Novell, Red Hat, IBM, and HP have invested in desktop Linux, too.

The result of all that work? A windfall for ASUS. The overlap between netbook sellers and desktop Linux funders is small. Intel and HP could use netbooks to justify their Linux desktop investments, but Sun? Red Hat? Novell?

The next question is: since PC manufacturers do better on "low-end" machines where Linux is a threat, and worse on "high-end" machines where the monopoly is still the monopoly, how can those manufacturers move the line so that the low end will satisfy more users? They don't need to control the software that moves the line, but as it moves, their earnings go up. Yes, there are some obstacles. Harald Welte writes, "...no single mainboard maker (probably apart from Intel's mainboard division and some parts of Dell) ever tries to boot a Linux Live-CD on one of their boards before shipping it, or bothers to get their ACPI tables correct." And some component vendors still rely on bonghits. (Yes, most vendor quotes make a lot more sense if you replace "Intellectual Property" with "bonghits.")

But a PC manufacturer that got serious about it could clear those obstacles pretty quickly, as Dell largely has. So the big task is moving the line of control up, which can only come with more functionality in desktop Linux software.

Right now, though, desktop Linux gets better because of developers doing peer production for the fun of it and for the signaling value, desktop spinoffs from companies doing development for server and mobile Linux, the ad-supported Firefox and friends of course, and Sun doing stuff for whatever reasons Sun does stuff. Unfortunately, that means potential line-moving software such as Ardour falls through the cracks. How much more could a PC vendor earn on a studio-capable tricked-out quiet PC if the clerk at Guitar Center had heard of Linux?

Just waiting for treats to fall off the table is bad business for the hardware vendors. Of course, a company could join the Linux Foundation or hire Realistic Linux Pilot Projects LLC (which may or may not exist) to push desktop Linux, but we need something better.

Fortunately, thanks to Sarbanes-Oxley and the changing ratio of software costs and investment transaction costs, the old Silicon Valley VC model is falling apart. It used to be a good bet to sign over your software to investor control in exchange for lottery tickets, I mean stock options. Today, the expected value of that software to you is probably higher if it's under a Free license, where it has signaling value (Look, Joe can write code and works well with others!) education value (hey, Joe, here's how to make your program do something I need) and value as a complement to your labor (Free software plus Joe hours is a good deal even though Joe hours cost a lot.)

So netbook vendors need a way to move their line of control upward, and software needs a new finance system.

Zak Greant has some ideas for Hacking Business Models. Interesting ideas, but so far they seem to depend on actual customers. In the netbook market, hardware vendors and Windows XP users benefit from the work of desktop Linux developers they have no contact with.

Anyway, the netbook story seems like a good example of where some kind of alternate tool for connecting projects and markets might be useful. Dominant Assurance Contracts? Feature Futures? Give hardware vendors a chance to invest in negotiating power directly, and Free Software authors a way to earn money before there's a critical mass of users asking for support.

Reproduced with kind permission of dmarti (Don Marti), original article here.