Ross Rubin (@rossrubin) contributes Switched On, a column about consumer technology.
If the PC marketplace were an ocean, you'd see a strange sight -- small fish (netbooks) eating medium-sized fish (notebooks) eating large fish (desktops). But PC vendors are only partially pleased with this inversion of the natural order. While they embrace the replacement of desktops with higher-margin notebooks, they fear the cannibalization of notebooks with low-margin netbooks. Fast-growing and inexpensive netbooks have become such a threat to the notebook business that Intel and Microsoft have been wrestling with how they can adjust pricing in order to persuade PC makers not to market budget Atom-based laptops that have screens larger than 10" such as the sleek 11.6" Acer Aspire One A075 or 12.1" Lenovo IdeaPad S12.

Slower, less expensive processors running an older, lower-priced version of Windows have put pressure on Microsoft's Windows revenue. But rather than bemoaning consumer demand for less powerful PCs, Microsoft would do well to create more incentive to purchasing more powerful ones. Apple has partially addressed this issue by including, enhancing and promoting iMovie and GarageBand in its bundled iLife suite. These are two applications that can become quite processor-intensive when used for sophisticated tasks, like stabilizing a jumpy video.

But even more significantly, Apple has made the issue moot by creating an effective floor in the Mac product line of an Intel Core 2 Duo. Clearly that's not an option for Microsoft, nor for many of its PC vendor partners catering to more value-minded shoppers. Indeed, Microsoft has optimized the Windows 7 kernel to run more efficiently on the lower-end netbooks that are the source for growth in the PC market. And that's the right move.

Nobody would advocate that Microsoft should produce bloatware, and Windows Vista took some of its early potshots because it ran poorly on PC hardware without sufficient graphics acceleration. Tuning Windows 7 should help change perceptions that Vista created and help it compete more effectively against a tuned Mac OS version coming in Snow Leopard.

Now is the time for Microsoft to start cashing in some of its R&D investments in new input methods, user interface, media processing and artificial intelligence.

The differentiator must be more than user interface polish such as the translucence and animation effects of Aero because that isn't enough of a pull for those on the fence. Graphically advanced video games are, of course, demanding applications that drove some of the most powerful consumer PC hardware. But they are not included with Windows and, while more people may play them than compose multitrack compositions in GarageBand, their appeal is also less than universal.

With Google's Chrome OS threatening to further attack the low end of the market, now is the time for Microsoft to start cashing in some of its R&D investments in new input methods, user interface, media processing and artificial intelligence to build more into Windows that requires advanced hardware. Such capabilities must be broadly appealing, either enabling users to do something they cannot do otherwise or in such an engaging way that consumers would hate to give it up.

The last thing Windows needs is a new SKU, but it's acceptable to create a minimum system requirements for a subset of features. These can help differentiate the high-end PC better and reinforce the industry's desired role of the netbook as a second or third companion device that runs Windows, yet can't deliver a full PC experience.



Ross Rubin is director of industry analysis for consumer technology at market research and analysis firm The NPD Group. Views expressed in Switched On are his own.

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Switched On: Compelling computing can keep netbooks niche