The low-cost laptop offer Microsoft can't refuse

There are signs that Microsoft is already taking steps to ensure Windows is available in various versions for low-cost computers.

Windows XP Starter Edition, a slimmed-down version of the operating system for developing countries, will be available in those markets until June 30, 2010. In addition, the software company recently hired Len Kawell, formerly CEO of Pepper Computer and one of the founding members of Iris Associates, a company created by current Microsoft Chief Software Architect Ray Ozzie during the 1980s to develop Lotus Notes. Kawell, who started at Microsoft on March 10, was given the task of developing a version of Windows Mobile designed for MIDs (Mobile Internet Devices), a product segment closely related to low-cost laptops.

MID is Intel's name for a range of devices that closely resembles the UMPC (ultramobile PC) platform developed by Intel and Microsoft, but with some key differences. Both will use a version of the Atom processor, and both are designed to be portable and rely on touchscreens or slide-out keyboards, but MID prototypes that Intel has shown are generally smaller and expected to cost less. The devices are also expected to run Linux instead of Windows.

Intel has been working closely with Canonical, Red Flag Linux and Pepper -- Kawell's former company -- to fine-tune the open-source operating system for MIDs. The chip maker set up a Web site, called Moblin.org, that provides developers with resources to develop mobile versions of Linux, including efforts to improve power management and develop a Mozilla-based browser that relies on a touch interface.

Much of this work, including Canonical's Ubuntu Mobile Edition, will run on laptops and desktops, as well as MIDs.

In addition to its large footprint, Vista may not be a suitable option for low-cost laptops because of its price, according to Navin Shenoy, general manager of Intel's Asia-Pacific operations. "I don't think you'll see a lot of Vista in this space for cost reasons," he said in a recent interview, noting that 25 low-cost laptops based on Atom are being developed by various companies.

PC makers are also saying that Vista is not a good option for the new class of products. During a recent press conference, Asustek executives predicted that of the 5 million Eee PCs it expects to sell this year, laptops running Windows XP Home edition will outsell their Linux-based counterparts by a ratio of 3 to 2.

While Linux is generally the preferred OS for low-cost PC maker Everex, the company has sold low-cost laptops with Windows XP in developing countries. Vista isn't an option since Everex's Cloudbook laptop doesn't meet the minimum hardware requirements prescribed by Microsoft for Vista.

"Even 512MB of RAM with [Vista] Home Basic, it's a slow machine -- underpowered and underperforming," said Paul Kim, director of marketing at Everex, adding that when it comes to low-cost computers, Windows XP "still seems to be a better path at this point."

Industry analyst Roger Kay, founder and president of Endpoint Technologies Associates, agreed that the cost of licensing Windows Vista will prevent Atom-based PCs from reaching Intel's target price of US$199 to $250. "Given the cost of the Windows license, which hasn't decreased anything like the rate that hardware has ... that makes for a greater incentive for customers and [PC makers] to look for an alternative," he said, calling Linux the best option.

If Microsoft makes an exception to its plans and offers Windows XP licenses for low-cost computers in the US and other developed countries after June 30, the software maker may not have to worry about eroding sales of Vista. Intel is working hard to segment low-cost laptops and mainstream laptops to prevent any overlap in sales.

To do this, Intel has set guidelines for low-cost laptops based on Atom, restricting the features they offer. For example, Intel has told hardware makers they can only use the chips in laptops with smaller screens, preventing vendors from producing a 14-inch laptop based on the Atom. The goal is to protect the mainstream laptop segment for more powerful and costly processors, like the Core 2 Duo, while catering to consumer demand for smaller, inexpensive laptops that complement -- but do not replace -- their main computers.

Perhaps Microsoft will realize that if Intel is comfortable segmenting the market in this way, they can be comfortable, too. They may not have another choice.