Thursday, May 15, 2008

Microsoft and the OLPC deal

I have been following Microsoft's courting of the OLPC project on Slashdot. Ever since my involvement with the FaunOS project, I've slowly convinced myself that it will be "portables" that pave the way down to ever cheaper, commoditized computing. And Linux has always figured prominently in my speculative conceptions of likely, future computing landscapes. So now what to make of Microsoft selling $3 copies of Windows [on OLPC]?

I believe a simple rule of markets is that once a producer breaks the price of its product in one market, it will eventually have to break prices for the product in other markets as well. (I tried googling for some such succinct rule but, alas, I couldn't come up with the right query terms.) From a long term investor's point of view, this cannot be good news for Microsoft. It is a short term coup for Redmond: having OLPC run on Linux risked cultivating a new cadre of non-Mr. Softies. A $3 copy of Windows thwarts that threat: few children would opt for the Linux version of OLPC--for obvious reasons not worth enumerating. But this sets up a bad precedent. Will Microsoft fight Linux with $3 licenses wherever Linux enjoys a clear cost advantage? My guess is that wherever a user interface is involved, Microsoft will fight to keep market share. Today the battle is staged on what I'll sweeping characterize as ultra-portables, like OLPC and Eee PC. (Okay, maybe it's not a full scale battle, yet, but hear me out..) From Microsoft's perspective, the distinguishing characteristic of the ultra-portables is price: that they are portable is irrelevant. But hardware prices inexorably fall, and we can safely assume to see hardware the size of an ordinary laptop selling at today's Eee PC prices. Cheaper hardware means either a free OS like Linux, or significantly lower Windows licensing costs. This deal is an example of the latter, and is a reminder that Microsoft's fat margin's and pricing power are receding.

Now don't mistake this entry for a Linux fan's attempt at finding a silver lining in a deal that effectively ditches Linux. In fact, I am very worried. Imagine a world in which Microsoft still makes a decent living selling mostly $3 operating systems. Somehow they figured out how the business model could work--e.g. leverage their monopoly position less obviously, or make up the lost margin through greater volume. Whatever. Microsoft could even be a lot smaller company and still control the desktop.

I doubt that is how history will unfold. Linux will win the desktop, but it'll likely be a long and dirty battle in which Microsoft will make a lot of noise while quietly imploding as its pricing power wanes and margins collapse.
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