Microsoft is in for a cold shower.
Sometimes the story of the week hits me like a bucket of cold water dropped from a door frame. Other times, it’s more like gentle rain shower that has the same cumulative effect on the top of my head. The story of this week falls in the latter category. One droplet of this story is Sun’s announcement that it will start selling Linux-based x86 desktop PCs to businesses. Sun’s spokesman claims the move is directed toward business users who need affordable PCs with rock-solid security. While Sun has not released prices, my guess is we’re talking about sub-$300 models. I wouldn’t be surprised if businesses could get 100 of these babies for $25,000.
Other drops, in no particular order: Wal-Mart now offers Linux-based PCs for under $200 while a comparably equipped Windows XP machine from the same store costs over $400. In the story referred to above, Dell was stated to be offering Linux desktop PCs again, after a long respite from desktop Linux. Microsoft is reporting soft demand for Windows XP. Intel and AMD have a virtual space race for the no-cost terahertz CPU.
Add it all up and it equals trouble for Microsoft. While prices of components of PCs and PCs themselves have dropped through the floor, the software that runs them has actually increased. Small wonder, then, that Intel, one of the most innovative companies over the past year, is sucking air while Microsoft continues to breathe easy. While cranking out Windows XP CDs costs Microsoft pennies per copy, it costs a great deal more to produce a CPU. Microsoft may claim that development costs for software are higher, but my Minnesota math says otherwise. Intel developed the specs, the x86 architecture, the fabrication technologies, etc. Microsoft merely produced the code that runs on the chips. The cumulative development costs for processors, and every other major component of a PC, are higher than that of software. This means makers of PC components are lucky to make a profit at all. Users are justified in asking why Microsoft should end up with almost all of the profits from PC sales.
The answer, of course, is competition. Before AMD made the Athlon, we heard some of the same complaints about Intel. The processor cost around $500 when low-cost PCs had yet to break the $1,000 barrier. Compared to the CPU and as a percentage of the overall cost of the machine, the operating system cost was a pittance (Windows 98 cost around $80). When AMD released its competitive product and started beating Intel in benchmarks, Intel dropped its prices. Now every week I read news of Intel or AMD making a breakthrough on transistor size, fabrication technology, clock speed, and performance. (Just an aside: Clock speed, as measured in megahertz, is only one determiner of performance. Architecture, resistance within the chip, and other factors also influence performance.) As processor performance continues to affirm Moore long after the pundits predicted we would finally prove his “Law” to be more of a rule of thumb, prices continue to drop. Now the CPU actually costs less than the operating system in many cases.
Just two years ago, the hard drive, video card, and even the Zip drive cost more than the OS. Now hard-drive makers (who are the unsung heroes of the PC over the last five years) struggle to make a few pennies per drive. Only one video and sound card maker is profitable right now. You can get a 64MB Sony microdrive for less than 80 bucks. LCD monitors only cost twice what Windows XP costs, while costing their manufacturers orders of magnitude more. And the list goes on. Yet Windows XP actually costs more than Windows 98 did and offers only a few benefits (and a licensing risk) over its older siblings.
If Microsoft is making all the profits from PCs, why is this bad for the company or its shareholders? (Full disclosure: Several of the mutual funds in my 401(k) benefit plan have Microsoft in their list of top 10 holdings.) It’s a boon now, but as companies continue to look under every rock for cost savings, Microsoft will be forced to cut prices on its OS. This is especially true as Lindows, which just came out with version 2.0, gains in features and ease of use. And it is also true of programs like Office, which now costs more than many of the computers it runs on. As OpenOffice (free), WordPerfect ($25), and even StarOffice (around $60) become passable replacements for Microsoft’s bloated flagship suite ($400), Microsoft will have to cut prices at least in half to maintain close to half of its current revenue stream from the cash cow.
This is all good for consumers of PCs, if not of mutual funds. But what does it mean for Microsoft? Ultimately, it’s also good for Microsoft. Microsoft has had a big margin for error for far too long. If a venture is a dud (e.g., set-top boxes) no matter. It could always fall back on the cash cows–Windows and Office. Now Microsoft can’t afford failed ventures. Just as Intel has become a much stronger company with AMD’s competition spurring it on, so will Microsoft be strengthened by the entire open source community, and now by Apple. Ultimately, this is the best news of all for PC users.
James Mathewson is editor of ComputerUser magazine and ComputerUser.com