The Microsoft machine seems to have been avoiding the netbook market, and there has been much discussion about what this might mean.  One recent article, Why Microsoft won't fight moblin, raises an interesting point about the economic relationship between Microsoft and Intel.  While this article discusses the performance ceiling that now confronts all of the hardware companies, it more importantly indicates that Microsoft has become too dependent upon the profits it was able to raise for higher-priced hardware.  Unfortunately, for Microsoft, the netbook market is not one of high-priced hardware.

I would like to add to this discussion by pointing out that changes in Microsoft products have been working their way towards a wider audience.  This includes all of the improvements that are intended to make Microsoft products easier and more intuitive to use.  Those of us that call ourselves power users and techies of various sorts spend plenty of time complaining about how these improvements dumb down Microsoft's products--making them less effective and less efficient.  But, this loss of effectiveness is just a side point.  The important point is that Microsoft wants to reach a wider audience so that it can sell more copies of its products.

The dilemma that Microsoft is now facing is a matter of basic economics.  They want to sell more copies of their product, but they are unwilling to sell at a price that is appropriate to a mass-produced product.  But then, this is the aspiration of all monopolies and monopoly wanna-bes--to have sufficient control to sell to everybody with an unreasonably huge profit margin.  Unfortunately for Microsoft, absolute control of prices only comes with absolute control of the market, and Microsoft is only a minor monopoly.  So, they have to settle for a market where mass sales occur only at relatively small profit margins.  

However, Microsoft's latest offerings have fairly stiff price tags--comparable to the price of an entire netbook.  While the prices for bundling Windows with a computer are cheaper, they still represent a significant percentage of a netbook's price.  And, those offerings are not targeted at the power users who might be willing to pay those prices.  In fact, the few features that interest power users are only available in the highest priced Microsoft products.  This is the sort of thing that makes the less expensive alternatives to Microsoft look so attractive to power users.  So, while the power users may feel over taxed or left behind, Microsoft's products are targeted at the widest audience possible--the audience that is least interested in paying anything higher than commodity prices.  

Microsoft's problem is further complicated by the fact that its last major offering, Windows Vista, was rejected by a significant number if IT departments.  Instead, IT departments continued to ask for and purchase Windows XP--Microsoft's now elderly Windows product.  While those purchases represented a revenue stream, it forced Microsoft to continue supporting XP, and supporting an older product seems to be more expensive as the product gets older and its security bugs become more exposed.  This was surly not the revenue stream that Microsoft had expected to draw for Windows Vista, and this was certainly a major budget issue for the development of Windows 7.

The resulting situation is that Microsoft is suffering from a significant drop in revenue, a significant increase in costs, and a product with limited appeal.  There just isn't enough in Windows 7 to justify its cost.  Microsoft will earn some revenue by selling it with new machines, as it did with Vista.  Microsoft is also in the process of trying to force IT departments to buy Windows 7 by ending support for Windows XP.  And, Microsoft is even adjusting its offerings for netbooks.

But, it doesn't appear the Microsoft has gotten the point about profit margins and reaching a wider audience.  It is not enough to make a product that is technologically accessible to the average user, you have to also offer that product at an accessible price.  To reach the widest market, you have to sell at discount store prices.  It simply does no good to design a product for a wide market and then price it beyond the reach of that market.

Now that the netbook has shown that there is a significant demand for budget-priced devices, many are working on software for that market.  While Microsoft has been designing for the users of that market, we can clearly see that they are behind in three distinct ways.  1) Windows Vista won't run on netbooks, and Windows 7 is late to the party.  2) Windows 7 wasn't originally conceived for the small screens of netbooks.  3) Bundled or not, the price is just too high for the netbook market.  As the alternatives to Microsoft improve and gain acceptance, Microsoft will be forced--not only to improve its small-screen usability and performance--but it will also have to lower its prices.  Otherwise, this could force Microsoft out of the netbook, laptop, and maybe even the desktop market.  And, Microsoft may have trouble thriving as a server-only solution.  The lesson, don't become dependent upon high profit margins for a mass-market product.