A new, inexpensive version of Windows XP will be offered in up to five countries in a one-year pilot starting in fall 2004. Available only on new PCs, Windows Starter Edition (SE) is a subset of Windows XP Home, with limited networking and other capabilities. The new OS could ease relationships with governments concerned that the high price of Microsoft software is retarding technological development, but its effect on software piracy and enthusiasm for Linux will take longer to gauge. It also sets an important precedent: users in other countries (and antitrust regulators) may push for similar limited-function OSs.

Need for Low-Cost Windows

Pressure has been building on Microsoft to create a low-cost version of Windows, particularly for poor countries where even the cheapest PC costs several months’ average income. While the Web and e-mail could be valuable information and communication tools in many countries, most of their population has no access to them. For example, in Indonesia, the world’s fourth most populous country, more than half the population lives on less than US$2 a day and less than 5% of the population has Internet access.

The Windows OS is the single most expensive component in some low-end PCs, and OS alternatives, primarily pirated versions of Windows, are used far more widely than legal versions in many countries. (Of the three countries already approved for Windows SE, overall software piracy rates range from 63% in Malaysia to 88% in Indonesia, according to the Business Software Alliance’s 2003 Global Software Piracy Study. The U.S. rate is 22%.) To deflect criticism that they are not doing enough against software piracy, some governments have begun to encourage greater use of Linux, which can be obtained legally but cheaply and will run on older PCs, such as those using 386 and 486 processors.

Neither continued piracy nor a move to Linux are good solutions from Microsoft’s perspective, and the company has made some tentative steps to lower prices and create low-end versions.

The most significant efforts so far have been made in Thailand, where in 2003 the government launched a "People’s PC" program that offered loans for the purchase of low-priced PCs. To ensure that its products would be considered for the program without exceeding government price ceilings, Microsoft offered a combination of special Thai-language versions of Windows XP and Office XP for less than US$40. That price compares with U.S. retail prices of US$199 for Windows XP Home and US$149 for Office Student and Teacher Edition, a total of US$348. (Major OEMs get substantial reductions on what they pay for Windows and are estimated to pay Microsoft between US$40 and US$75 for each copy of Windows XP Home that they sell with a PC.)

The Windows Starter Edition Program

The Thai program raised eyebrows around the world and has led to requests from other national governments for similar price concessions. In an effort to avoid multiple, one-off deals in different parts of the world, Microsoft has created a simplified version of Windows that can be used more widely in less-developed countries.

Billed by Microsoft as "the most affordable Windows operating system offered to date," Windows SE is estimated to have a price of less than US$40. The OS will meet basic requirements for an Internet-ready PC, but it is designed for low-end hardware and dial-up-networked environments.

Built on the same binaries as those in Windows XP with Service Pack 2, Windows SE has hardware requirements similar to those of Windows XP Home Edition (minimum 64MB of RAM, 1.5GB of hard disk space, and a 233MHz processor). However, the OS will not run more than three applications at a time, is fixed at 800 x 600 pixel displays, and does not support local networking or multiple user profiles. It does include Internet Explorer, a new help system designed to be easier for first-time users, instant messaging software, and Windows Media Player 9.

Beginning Oct. 2004, Windows SE will be initially available through OEMs and system builders (smaller computer makers) in three Asian countries: Indonesia, Malaysia, and Thailand. The OS will initially be available in the Thai language and in Malay, spoken in both Malaysia and Indonesia. Two other countries, from a list believed to include Brazil, China, India, and Russia, are expected to be added around the time the program is launched.

A Fine Line

In creating and promoting Windows SE, Microsoft is treading a fine line. The disadvantages of a low-cost version of Windows include the following:

• Cannibalization of sales of higher-priced versions of Windows, such as Windows XP Home Edition
• Lower profit margins in its most profitable business, the Windows client
• Demand from other countries—and even from major OEMs in North America and Europe—for the right to sell Windows SE.

On the other hand, Windows SE could meet many other Microsoft goals, such as the following:

• Better relationships with local governments, who see Microsoft willing to sacrifice margins in order to make computing more affordable
• Significant expansion of the Windows user base in Asia, where much of the growth in PC use is expected to occur in the next five years
• An effective deterrent to Linux
• Stronger OEM and system builder partnerships in Asia. Small PC vendors, frequent targets of antipiracy campaigns from both Microsoft and local governments, can now offer customers an inexpensive but legal version of Windows that adds only modestly to PC prices and that can be better supported by Microsoft and Windows Update.

Will It Be Enough?

In spite of these advantages, the program is not guaranteed to succeed.

Windows SE is likely still more costly than pirated software or Linux (which can be legally copied). Earlier versions of Windows, such as Windows 98, are easy to copy and will run on a computer with an Intel 486 processor, 24MB of RAM, and a 400MB hard disk. Such computers are not uncommon in developing countries, where surplus computers from wealthier countries are often recycled for use.

Windows SE is likely to become a wedge that governments elsewhere in the world use against Microsoft, as governments in other countries whose poverty and piracy rates are even worse than those in the three participating countries ask for similar concessions. That could lead to further price concessions and pressure on Microsoft’s profit margins.

The existence of Windows SE also challenges an argument that Microsoft has often used when asked by governments (such as the U.S. Department of Justice or the European Commission) to produce a version of Windows without certain features, such as Windows Media Player. The company has argued that it is too difficult to remove features from the OS and to offer multiple versions of the product aimed at particular geographic regions. Yet, Windows SE shows that Microsoft is willing to sell a specialized subset of the OS in some countries.

Notwithstanding those problems, the program need not be a financial success to achieve some important objectives, such as better relationships with governments that, in many cases, have looked the other way in the face of flagrant piracy. Microsoft can now argue that it has made a significant effort to provide their citizens with a modern, inexpensive OS, and that encouraging its widespread adoption will be beneficial to citizens and to the nascent IT industries in their countries.

The company can also mitigate the spread of low-cost Windows by limiting Windows SE to language versions that are not likely to see wide use in more advanced economies and among business customers.

Finally, although Microsoft’s profits from this version of Windows will be far lower, the company has much to gain from wider adoption of legal versions of Windows, which would lead in ensuing years to lower demand for pirated software and greater demand for application software from Microsoft and other Windows application vendors.

Resources

The Business Software Alliance study on global software piracy can be found at www.bsa.org/globalstudy/.

Programs to make Windows available in other languages were described in "Language Localization Accelerated" on page 31 of the May 2004 Update.

Microsoft programs to make low-cost hardware and software available to nonprofits and other organizations were described in "Surplus PC Programs Aid Nonprofits" on page 35 of the June 2004 Update.

Strategies and deals aimed at Asian governments and customers were described in "New Prices, Deals Boost Asian Prospects" on page 26 of the Apr. 2003 Update.