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The $100 PC? No Chance in Hell Without L

I read this week that Steve Ballmer, CEO of Microsoft, is calling for a $100 personal computer. This is a remarkable turnaround for a guy who, when we started selling a $199 computer at Walmart.com, criticized us. Some of you may recall that he said a $199 computer wouldn't sell well enough to even be in retail stores. Does this represent a shift in thinking by Microsoft who now sees the value that affordable computing can bring to the world? I don't think so. Mr. Ballmer's comments are double-speak, reminiscent of the best politicians who make promises they know cannot humanly come to pass but sound good in the interview. It's even worse because Microsoft has a strategy to keep software costs artificially high by exacting patent duties on Linux companies, making a $100 PC unattainable.

It's quite hypocritical of Microsoft to call for a $100 PC, when what we really need is $10 software. By far the largest cost of the PC is Microsoft's software, and their profits dwarf those made by the hardware manufacturers in the PC business. It's no secret that the PC hardware business is a very tough, low-profit business. Many computer manufacturers operate with a 10% margin or less. That means that on a $500 computer, the manufacturer will make $50 or less over their cost. PC companies regularly go out of business or turn in money-losing quarters. Meanwhile, Microsoft charges about $100 for Microsoft Windows XP and $200 for Office XP to those same computer manufacturers. Because there is no direct cost to copy software, Microsoft's gross margins are around 90%. PC vendors should be calling on Microsoft for $10 software if they want to bring PCs to the mass market. It's also the only variable cost. A computer manufacturer has real parts he must pay for (processors, memory, hard disk, etc.), but Microsoft is free to charge an arbitrary price for their software. They long ago covered their initial research and development costs, and now use excess profits to fuel and subsidize other business ideas like the video game business, TV news, or watch computers.

Despite Microsoft's public proclamations of finding the religion of low-cost computing, they do not want a $100 PC because the software would be a fraction of the price that it is today, which would signal an end to their monopoly pricing power. Behind the scenes, their plan is to make it impossible, yes impossible, to make a $100 computer. Ramping up their patent team and armed with nearly 10,000 patents granted or pending, Microsoft is hoping to saddle companies with patent fees. Their hope is to make money on every copy of Linux and every office suite through patent fees, keeping the cost of software artificially high. How much per copy of desktop Linux? How much per office suite shipped? How would it be possible to make a $100 computer if Microsoft expected such patent fees? These would be great questions to ask Mr. "$100 PC" to see if he is genuinely interested in making a $100 machine. (Remember these would be JUST for the patent rights, not the actual software.)


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As for Microsoft offering a less-expensive, stripped-down version of XP, I wrote about the fallacy of that idea in August. Today, desktop Linux already offers an excellent, feature-for-feature experience compared to the full XP, so it makes no sense for someone to pay more for an operating system that has been intentionally crippled, just so Microsoft can protect their massive profits. Besides, no emerging country trying to compete on a global scale should be saddled with crippled software.

When the world sees a $100 PC, it will be running Linux, not Windows XP, just as the first ready-to-use $200 PC was running Linux. It will be a few years before this becomes an economic reality, but to get there the software must get down to the sub-$10 range. If it comes about, it will be in spite of Microsoft, not because of them.

-- Michael

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