The low-cost laptop offer Microsoft can't refuse

As the release of low-cost laptops based on Intel's upcoming Atom processor draws near, Microsoft is getting boxed into a corner. The software company plans to stop selling most Windows XP licenses after June 30, yet most of these low-cost laptops won't be powerful enough to run Vista when they arrive later this year.

That leaves Microsoft executives with a choice: Do they extend the availability of Windows XP for low-cost laptops, or possibly concede this nascent market to Linux?

[ Sidebar: Despite deadlines, Windows XP to be sold a few more years ]

The poster child for the low-cost laptop is Asustek Computer's $249 Eee PC, which hit the market in October last year and runs the Xandros distribution of Linux. Consumers in the U.S. and elsewhere embraced the laptop, which uses a version of Intel's Celeron M processor, for its small size and ability to perform basic tasks like Web surfing and e-mail. It became something of an overnight sensation, and that success caught the attention of other hardware makers, including top-tier PC vendors.

The Eee PC's success wasn't possible without Intel's support. The chip maker was initially hesitant to embrace Asustek's push into low-cost laptops for fear it would drive down margins for its mobile processors if users opted to buy low-cost laptops instead of more powerful -- and more expensive -- models. But Intel eventually decided that the opportunity to expand the size of the overall laptop market outweighed the risks of lower profit margins and gave its backing to the little laptops.

Intel's support for low-cost laptops is ready to shift into overdrive. The company's upcoming line of Atom processors, relatively inexpensive chips that consume little power, will show up during the third quarter in small laptops -- priced from $250 to $300 -- that will be aimed at users in developed markets and heavily promoted by the chip maker. Intel executives want these laptops to be cheap enough that U.S. and European consumers don't think twice about buying them as a second computer. Most are planned to ship with either Linux or Windows XP, even though they will arrive after Microsoft's June 30 deadline has passed.

Windows Vista isn't a viable option in this product segment: It's too expensive and does not work on the stripped-down hardware configurations required to keep prices low.

"At the low end, Vista's hardware footprint is too large," said Tom Rampone, an Intel vice president and general manager of the company's Channel Platforms Group, noting that some low-cost laptops, such as Intel's Classmate PC, have just 2GB of solid-state storage instead of higher-capacity, more costly hard disks.

That small amount of storage rules out the use of Windows Vista on these machines, even Vista Starter, the stripped-down, low-cost version intended for sale only in developing countries. If Microsoft declines to make Windows XP available for low-cost laptops, that could guarantee that Linux -- as the only realistic alternative -- would be left to dominate this segment of the market.

"They're not going to sit by and let that happen," said Bryan Ma, director of personal systems research at IDC Asia-Pacific.