Those geniuses in Redmond seem to have decided that we'll pay just about anything to get rid of Vista, even if that means spending $119 to upgrade to Windows 7. By the way, that's $119 per user, not per household.There are a lot of emerging business models out there, but price gouging isn't one of them. And hitting your installed base as if they were captive dummies is no way to win customer loyalty either.

It's also very odd for Microsoft to charge so excessively for an upgrade on the heels of a price-comparison campaign targeting Apple that actually seems to have made an impression for once.

But Apple, which made significant improvements to its OS with Snow Leopard, is charging $29 for an upgrade, and $49 for five users. So who's more expensive now?

NPD Group analyst Stephen Baker noted that Microsoft's pricing is quite the turn-off to customers:

$119 is ... way too much for the software. While I acknowledge that this is down from Vista pricing, that is damning with faint praise. It is in Microsoft's best interests to erase all vestiges of Vista from consumers' homes, and by making the upgrade expensive (and a bit painful, more on that in a moment) Microsoft is creating a large disincentive for consumers to move to a far superior platform with a better user experience.

Microsoft thinks it can get away with this because it's operating on the assumption that it still hasn't got any competition. Only here's the thing: there's this thing called the Internet that's proving to be quite a decent operating system in its own right. Technology advances like HTML 5 mean that applications can run in the cloud more efficiently and as elegantly as on a desktop, causing device manufacturers like Acer, Asustek, HP and Intel to rush incredibly popular netbooks to market.

Microsoft CEO Steve Ballmer mistakenly believes netbooks are another opportunity for Microsoft to sell Windows 7 -- earlier this year, he claimed that more than 90 percent of netbooks were sold with a crimped version of Microsoft XP (the full version of XP is too cumbersome -- and don't even think about running Vista on a netbook), but those numbers predate the availability of Android as a netbook operating system, not to mention Intel's Moblin OS.

In other words, Windows had a great "attach rate" to netbooks because consumers and OEMs really didn't have a choice. That's Microsoft's preferred way of operating of course -- stifling competition is its stock in trade -- which is exactly why it's on the path to Loserville.

Ballmer thinks he's clever when he quips that "it's hard to compete with free" because, in his mind, you get what you pay for. But paradigms change, and new business models (like what Phil Wainewright calls freemium) are emerging that actually deliver high value for low or no direct cost to end users.

The prediction here is that Windows 7 will be a smashing success for PCs and laptops -- market segments that are declining faster than the U.S. car industry -- but will be a non-factor in netbooks and small form-factor computing devices.

Pricing issues will be irrelevant at that point, but it will be obvious that Microsoft's pricing strategy stopped Windows 7 from ever having a chance.