Ultra-Cheap Computers: A Threat To Microsoft?

A growing trend of ultra-cheap computers is threatening to damage Microsoft's hold on the desktop software market by attacking the core market to which Windows and Microsoft Office actually sell: PC bundles. Microsoft sells the majority of its Windows and Office licenses preinstalled with new PCs, but as PC prices fall--to as low as $200 a box this year--the cost of Windows and Office licenses, as a percentage of the total system cost--is rising dramatically. That's causing PC makers to look at alternatives in ever increasing numbers, to both of Microsoft's core products.

Wal-Mart's cheap PCs are leading the charge. Available in versions with Windows, with various Linux distributions, or with no OS installed at all, the Wal-Mart PCs are rebranded Microtel boxes that generally sell in the $200-400 range sans monitor. The machines are filled with exactly the kind of cheap componentry you might expect, including Via Technologies chips, rather than more powerful versions from Intel or AMD, and low-speed, low-capacity hard drives and CD-ROM drives. But for just a couple of hundred bucks, even the thriftiest of customers can now outfit themselves with a fully functional computer. And some of those PCs are shipping without any Microsoft products on board.

One such system runs the controversial LindowsOS, a Linux distribution that was originally touted as having full software compatibility with Windows. The makers of LindowsOS have backed off from that claim in recent days, but the company is still in the hot seat, this time with AOL Time Warner, for claiming that its system, along with a beta version of AOL for Linux, constituted an "AOL Computer" that consumers could buy cheaply, expressly for the purpose of accessing the AOL online service. Despite claims and counterclaims between the people at AOL and LindowsOS, this AOL Computer is indeed exactly what it appears to be: A cheap way to access the AOL service using a machine running absolutely no Microsoft software.

On the office productivity front, the move to non-Microsoft alternatives continued this week when Sony--the fastest growing PC maker in the world--announced that it would bundle Corel WordPerfect 2002, rather than Microsoft Office XP, with all of its desktop machines. And for laptops, Sony is pursuing a low-cost Microsoft option that many PC makers are also using in lieu of the more expensive Office suite, a standalone copy of Microsoft Word 2002. Some PC makers are using Microsoft Works 2003 instead. What it comes down to, of course, is cost: Sony and other PC makers just can't justify the high license price for Microsoft Office on machines with ever-cheaper prices. Just like any other component of the system, the company reevaluates its software bundles from a pricing perspective, and when the cost gets too high, the software is trimmed or replaced.

Just a few short years ago, Microsoft could brazenly tout the amount of money it made per PC, and rely on the income from hundreds of millions of annual PC sales to bolster its bottom line. But as computers become more of a commodity--thanks, ironically, in part to Microsoft's success--and are sold much more cheaply than before, the cost of Microsoft software hasn't fallen to match this trend. As Judge Thomas Penfield Jackson noted in his landmark antitrust ruling against the company, one of the marks of a monopolist is that it can price its products in a way that bears no resemblance to market realities. Clearly, in the OS and office productivity markets, Microsoft is doing just that. Analysts predict that the company will partially respond to this situation by issuing new, lower cost versions of Office 11 next spring. But in the meantime, many companies are busy looking for Microsoft alternatives.