EETimes May 12, 2003 By Charles J. Murray Park Ridge, Ill. - Aiming at the low end of the embedded market, Microsoft Corp. aggressively cut prices last week in a bid to spread the software giant's influence across a broader swath of industries. Chairman Bill Gates told the Windows Hardware Engineering Conference in New Orleans that a stripped-down version of its Windows CE.Net 4.2 software will sell for $3 or less, a drop of about $12 from the full-featured edition. The dramatic cost-cutting could cause concern for competitors, industry analysts said last week, because it might signal the $25 billion-a-year giant's willingness to bear the long-term burden of slim CE.Net profits in exchange for gaining a foothold in low-end applications. "This could really shake up the market," said Chris Lanfear, embedded analyst for Venture Development Corp. "If I'm Wind River, I might not be quaking in my shoes right now, but I should be concerned that this is another thing that could impact my share price." Microsoft's announcement, which takes effect on the new Windows CE.Net 4.2 Core on June 1, could make the Redmond, Wash., company a contender in applications like entry-level voice-over-Internet Protocol (VoIP) phones, digital cameras, DSL modems, DVD players, set-top boxes, factory automation devices and hundreds of other low-priced products in which CE has had little traction. "By dropping the cost, they give themselves a much better chance to get a foot in the door on those devices," said Daya Nadamuni, senior analyst for Gartner Dataquest (San Jose, Calif.). Lessons to learn? Some makers of embedded operating systems, however, insisted they were unconcerned, saying Microsoft doesn't grasp the economics of $100 products, in which profit margins are typically razor thin and EEs obsess about pennies, let alone $3. "The price is still way too high," said Dan O'Dowd, president and founder of Green Hills Software Inc. (Santa Barbara, Calif.), which sells embedded operating systems. A $3 price tag "isn't even close to acceptable," he said. Microsoft executives say their pricing model requires significantly less up-front cost than the subscription-based business models of Wind River and Green Hills. Proponents of subscription pricing, meanwhile, argue that the up-front cost-of $15,000 annually for Green Hills, and $7,000 to $12,000 for Wind River-can be reapplied to an unlimited number of projects, and it does not penalize OEMs for high production volumes. Still, Microsoft is betting the new price will give it an entree with developers that might never have considered using Windows CE on an embedded product. Device makers get the hard real-time OS kernel, along with networking, power management, file system, communications and multimedia technologies. To keep costs down, Microsoft doesn't include Windows Messenger, WordPad, Remote Desktop Protocol or Internet Explorer 6, features it calls geared for applications that need "rich" user interfaces with browsing capabilities, such as advanced VoIP phones, mobile handsets and digital media players. Those features will appear in a professional edition, with a CE run-time license of about $15. While Microsoft widely published the $3 royalty figure last week, the company also said it would charge "significantly less" for high volumes. Industry analysts said that prices beneath $3 could be particularly appealing to developers. "If you're talking about a buck a copy, then it could have a huge impact," said Lanfear of Venture Development. "Microsoft's competitors have to be concerned." Some competitors privately worried that Microsoft's financial muscle gives it staying power to live off slim profits while waiting for a payback in the low end. "Microsoft could afford to subsidize any amount of loss on CE," said one engineer who asked not to be named. "They could charge a dime for it, or even give it away, and it would still be seen only as pocket change on their balance sheet." But most competitors said they don't see Microsoft immediately stealing low-end business. Windows CE.Net, they said, is still geared too heavily toward devices with complex user interfaces, not so-called "headless" devices that make up much of the sub-$100/unit market. "The announcement isn't significant because the technology they're providing in the new Core package is a 'me-too,' " said Sy Choudhury, director of market development for digital consumer products at Wind River (Alameda, Calif.). "It also comes at too high a cost of ownership for the developer." Analysts see the move as less a tactical attack on competitors and more a long-term strategy to wear them down. The main threat, said Dataquest's Nadamuni, will come when Microsoft diversifies and focuses on specific niches. "And that's probably not going to happen for a few more years," the analyst said.