Low End Feels The Weight Of Windows

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September 18, 1998 (12:00 AM EDT)

As PC prices plummet, the disproportionately high price of Windows 98 has begun to weigh heavily on PC makers' cost structure. The question: Will Microsoft address the low end PC market or will vendors seek alternatives?

In the lowest-priced PCs, for instance, Windows 98 composes roughly 20 percent of the cost, leading some to conclude market pressures will force Windows to go on a diet.

"I believe Microsoft will port a desktop version of Windows CE or develop a Windows 'lite' to respond to the low-end PC market," said David Goldstein, president of Dallas consulting firm CMC. "They won't let this market slip through their fingers."

"Microsoft needs to adjust the pricing on Windows 98 or develop Windows 'lite,'" said Bill Lynch, president of PC maker Proteva, which markets $599 systems.

For the time being, however, Microsoft (company profile) doesn't think it has a problem. A spokeswoman last week said the company does not anticipate lowering the price of the Windows operating system in the foreseeable future.

Microsoft's apparent unwillingness to embrace the low-end PC market's needs stands in stark contrast to Intel's recent Celeron chip releases, a response to eroding market share.

Windows, which runs more than 90 percent of the world's PCs, costs original equipment manufacturers and small PC vendors from $60 to $80 per copy. It is among the most expensive elements of low-cost PCs.

While PC makers are unhappy with the price, some said the lack of alternatives leaves little choice.

"Out of all the components in the system, the software is the least expensive to make, and ends up being the highest priced in royalties. But where else can we go?" said Randy Scott, vice president of IBC, a PC maker in Simi Valley, Calif. "We're the new kid on the block and have to conform, and Windows 98 is the standard."

IBC recently introduced a $599 PC based on Windows 98.

Although several alternative Oses for PCs, including Linux, Be's BE OS, and Brother International's GEOS 3.0, are available, none is positioned to challenge Windows. Many low-priced PCs will hit the market this holiday season, including models from IBM, Packard Bell, and Compaq, but all will use Windows.

"I don't think vendors will apply more pressure on Microsoft to decrease pricing or use anything else because there's no major competition coming out," said Cameron Duncan, PC analyst for ARS, Irving, Texas. "It would be a support nightmare for them [to support multiple operating systems] and will remain this way for the foreseeable future."

According to Dataquest in San Jose, Calif., Microsoft's market share is expected to peak at 95 percent in 1999, the year its next-generation NT and Windows 2000 OSes are scheduled for release. Worldwide shipments of non-Windows operating systems, including DOS and OS/2, are expected to dwindle from roughly 8 million units in 1997 to 6.9 million units in 1999. Meanwhile, shipments of Windows will increase from 85.6 million in 1997 to nearly 122 million next year.

"Part of reality is there isn't a lot of alternative software," said Dean McCarron, a principal for Mercury Research, Scottsdale, Ariz. "We might see Windows CE make inroads, and Java is one possibility, but [Java] needs to be more developed in terms of system services and become more widespread."

Several vendors have attempted to chip away at Microsoft's lead in the OS market by releasing versions of Linux, an open OS. Sophisticated PC users have embraced the stable, Unix-like environment because it's easy to program and customize.

However, the two leading retail versions, Caldera Linux and Simon & Schuster's Complete Red Hat Linux 5.1, hold only 1.6 percent of the U.S. market, according to PC Data, Reston, Va.

"Windows is Windows, and there's no way to compete against it."
-- Dean Shulman
Brother International

Meanwhile, IBM's 32-bit OS/2, which picked up steam prior to Windows 95's launch, now owns a market share of just 0.4 percent, PC Data said.

Brother and Be said they don't compete with Windows.

Brother International (company profile) in Bridgewater, N.J., licensed the GEOS 3.0 operating system from Geoworks for a fraction of the cost of Windows 98 to use in its color GeoBook systems, which were launched six months ago, officials said.

The GeoBook, based on Advanced Micro Devices' ELAN SC300-33 chip set, comes with a full applications suite and e-mail for $599.

"Windows is Windows, and there's no way to compete against it," said Dean Shulman, senior vice president for Brother International. "We offer a low-cost alternative for people who want a notebook and want to write newsletters or do e-mail."

Geoworks, the maker of GEOS 3.0, is targeting the smart-phone industry. The company has no plans to license the operating system to another notebook PC vendor or to a PC-like product, said a Geoworks spokesman.

Officials at Be, based in Menlo Park, Calif., said their aim is to coexist, not compete, with Microsoft. Be's multimedia BE OS targets developers and is designed to run on top of Windows and Macintosh environments. It is available only from the company's Web site. Be released its first PC version in March. The company has not yet licensed the OS to any hardware vendors.

"We're positioning ourselves as a multimedia OS mainly, so we're not in direct competition with Microsoft," said Sylvie Pelaprat, a company spokeswoman. "We have no will to do that."