Netbooks Slam Shut On Vista Sales

Revenue from Microsoft's key Windows franchise grew just 2% in the most recent quarter as more PC buyers opted for smaller, more nimble, netbook-style devices that don't need a fat OS like Vista. Does Redmond have an answer for this trend?Sales from Microsoft's Client division, which derive mostly from Vista now that Windows XP has been formally retired, edged up just 2%, year-over-year, to $4.21 billion in Microsoft's fiscal first quarter, the company said Thursday, despite the fact that the overall PC market grew 10% to 12% during the same period.

For Microsoft, that's got to be a disturbing sign that Windows sales are decoupling from the PC market.

Redmond's problem: An increasing number of computer buyers, mostly in high-growth, price-sensitive emerging markets, are realizing that they can get by with so-called netbooks for most of their online requirements. It's a fact that's leaving Windows Vista out in the cold in some of the world's fastest growing tech markets.

Netbooks, from offshore manufacturers such as Taiwan's Asus, typically lack the horsepower to run the big and bulky Vista. But they're fully capable of performing routine computing tasks such as e-mailing, Web surfing, and instant messaging. Many models feature the free Linux OS.

Microsoft was expecting its Client unit to post a first quarter sales gain of 6%. But the company failed to anticipate the impact of netbooks, conceded Bill Koefoed, general manager for investor relations at the software maker. "The underlying mix was different," said Koefoed, during a conference call with analysts Thursday.

Koefoed noted that sales growth for traditional-style PCs in mature markets such as North America was flat during the quarter, while netbook sales enjoyed "strong double-digit growth" in emerging markets. "It's too early to determine the extent to which the netbook segment is cannibalizing the traditional PC market," said Koefoed.

To keep pace with the trend, Microsoft clearly needs to develop a version of Windows that's tailored for the netbook market, where systems often feature Celeron-class processors and limited memory. The company needs a version of Windows that falls somewhere between Windows Mobile and the full-fledged Windows fat client.

Koefoed hinted that Microsoft may be working on just that. "We're well-positioned to participate in this segment," he said.

Is Microsoft working on a pared-down version of Windows 7 specifically for the netbook market? It has, after all, already revealed development of a Windows version for cloud environments. The company's Professional Developers Conference next week in Los Angeles could shed some more light.