Will Win XP beat out Linux in the sub-portable market?

When Asus first announced its Eee PC around this time last year at the Taiwan Computex, it made headlines because of three things:

First, the price. At $199, it immediately changed the business model. Suddenly, small does not have to be expensive.

Second, instead of a conventional hard drive, the Eee PC was configured with a solid-state drive. Never mind if the capacity was rather limited (4GB). Having a SSD meant no moving parts, and therefore, a less fragile (and also lighter and faster) device.

Thirdly, no Windows. The Eee PC used instead a Linux distro called Xandros. What made it stand out in particular was the extremely easy to use Easy Mode Menu. And with the plethora of built-in applications, the Eee PC came out acting more like a consumer device instead of a computing device. In fact, unlike most mainstream notebooks, off the shelf and out-of-the-box, it was instantly usable.

In fact, Asus got it right early on by trying to market the Asus Eee PC as a consumer device (“It is not a notebook.”) and by selling it via consumer-oriented retail channels as well.

The pre-launch hype generated by the announcement was nothing short of phenomenal, so much so that inspite of Asus eventually doubling the price and downgrading the configuration when the Eee PC was finally released after several delays, it went on to become a bestseller as it continues to be today.

Unfortunately, Asus was soon besieged with component shortage, limiting the Eee PC’s production run. Asus was nevertheless complacent and predicted that competition will start to show up only in the second half of 2008. However, as we have predicted (given the Asus Eee PC basically used off-the-shelf components and open source software), competing products started appearing by Q2 this year.

Yet no one competing product has, to date, come close to the original Asus Eee PC 701 in terms of value for money. (The MSI Wind, which is scheduled to ship next month, might be the first serious contender.) So Asus has had an incredible opportunity for some time now to further strengthen its dominance in the low-cost sub-portable market segment that it has itself created.

It could have easily achieved this by simply maximizing economics of scale and reduce prices downward towards the original $199. Especially since subsequent product introductions by the competition all failed to match the Eee PC’s value for money proposition.

But Asus instead chose to chase after the competition by upgrading the original configuration, adding a bigger screen, more memory, and increasing its price. Instead of letting the competition chase after its dominance with its 701 model, with its newer 900 model, it became simply one of many contenders fighting for the mid-priced sub-portable market.

But the repercussions of Asus’ strategy go beyond Asus’ potentially losing its dominance in this market segment. For in upping the hardware ante (and thereby, increasing the cost), Asus has inadvertently given new life to Microsoft Windows XP.

Previously Microsoft has announced it will cease to offer Win XP by June 30, 2008. But alarmed by the inroads Linux was able to make with the emerging proliferation of low-cost sub-portables, it decided to extend the product life of Win XP and offer it to the manufacturers at substantially reduced prices.

Still, the minimal configurations of the sub-portables meant a dismal performance by the bloated XP, especially compared to the leaner Linux distros. Moreover, the sub-portables’ low price meant Microsoft had to provide hefty discounts to the manufacturers. Even then, the licensing fee meant an increase in the retail price. Thus, most manufacturers ended up providing upgraded and higher priced Windows configurations for their respective products. The price difference allowed the Linux versions to remain attractive to potential buyers considering the Windows alternative.

But the recent introduction of newer models featuring bigger screens, additional RAM, hard drives, and higher prices have altered the playing field again. The additional computing power means better hardware hosts for Win XP. The price increase lessens the significance (in terms of percentages) of the licensing fee. Suddenly, having Win XP on a sub-portable seemed a very attractive deal again.

The newer models have also reversed the trend of sub-portables becoming more consumer appliance-like and now appear to be positioned as mere lighter and smaller alternatives to other notebooks in the mid-priced market segment. Guess what? This has always been Microsoft Windows territory. Linux seems suddenly out of the running again.

So will Win XP now beat out Linux in the sub-portable market?

While the developing trend looks very much leaning towards such outcome, we don’t think Microsoft will be able to deliver the knock-out punch just yet.

Unless Asus reverses its direction and decides to offer again an entry-level model at under $300, it will likely lose the its dominant position in the ultra-portable market by December. Its traditional rivals MSI and ECS will probably introduce entry-level models in time for the holidays and these will fight it out for market share. (Cheaper MSI Wind and ECS G10IL variants, perhaps?)

And expectedly, these entry-level models will have Linux instead of Windows XP. More significantly, they will also have very user-friendly menus directed towards the original 2nd billion user target of the Asus Eee PC. And this should give Linux renewed hope of penetrating the consumer market even deeper.