Why netbooks are killing Microsoft

When Microsoft laid off 5,000 people in January, analysts and pundits pointed to plenty of reasons for the first major layoffs in the company's history. The obvious culprits included the overall economic meltdown, Apple's continued success and Wall Street's desire to see a leaner Microsoft.

But the real cause of the layoffs can be summed up in a single word: netbooks. These lightweight, stripped-down laptops that sell for between $200 and $400 have taken a big chunk out of Microsoft's bottom line. Unless the company comes up with a plan to handle them, its revenue will stagnate.

[ InfoWorld's Tom Sullivan makes the case that the main culprit in the Microsoft layoffs is Vista. | The InfoWorld Test Center rates netbooks for business. See who came out on top. ]

In announcing the layoffs, Microsoft said that its revenue had increased an anemic 1.6 percent in the quarter that ended Dec. 31 compared to the same quarter a year earlier. But that number doesn't tell the whole story. Windows took the biggest hit, while systems for servers and related tools had hefty increases in sales. Windows sales were down an eye-popping 8 percent; server and related revenue grew 15 percent.

Microsoft clearly blames netbooks for the drop in Windows sales. Here's what it said in its statement: "Client revenue declined 8% as a result of PC market weakness and a continued shift to lower priced netbooks."

Netbooks have become the only bright spot for PC makers, with sales accelerating while the rest of the PC market stays in the doldrums. According to IDC, 10 million netbooks were sold in 2008 and that number should double to 20 million in 2009.

Why is all this bad news for Microsoft? First, an estimated 30 percent of all netbooks ship with Linux. That means Microsoft doesn't get a penny for Windows from 30 percent of all netbooks being sold. Given that netbooks represent the fastest-growing PC market segment, the company's problem may get worse with time.

In addition, netbook owners who buy Linux machines won't be buying Microsoft Office, handing Microsoft an additional revenue hit for every Linux netbook sold. So it's not surprising that in the most recent quarter, sales of Office were anemic. Overall, sales for Microsoft's business division, which is in charge of Office, were up slightly, at 1.9 percent. But sales of the consumer version of Office plummeted 23 percent -- and consumers are the people buying netbooks.