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Microsoft's new challenger: Moore's Law
Entire PCs can be had for less than the cost of Microsoft Office software -- and a market is born.
August 28, 2002: 4:48 PM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - In these recessionary times, holding the line on costs is foremost in most executives' minds.

Thankfully, in the technology world -- unlike, say, real estate -- Moore's Law and its corollaries keep innovation chugging along and prices continually on the decline, thereby lowering costs for us consumers. Case in point: You can buy a low-end computer today for $400, when five years ago it would run you at least $2000.

This has some PC manufacturers jumping into a different market altogether: the low cost corporate computer. IDC reports that sales of "white boxes," or generic low-cost PCs -- equipped with less than state-of-the-art components and processors -- now make up roughly 30 percent of the overall PC market. Companies such as Microtel have been selling white boxes for years, but last week Dell announced that it, too, would begin selling two lines of ultra-cheap PCs.

But as prices continue to drop and demand for cheapies grows, one company is finding itself priced out of the party: Microsoft (MSFT: down $1.46 to $49.38, Research, Estimates). That's because its standard word processing, planning and spreadsheet software package, Microsoft Office, costs north of $450 -- almost as much or sometimes more than the entire cost of a PC itself.

With broad licensing deals, the cost for PC manufacturers is likely lower than the $450 retail price, but even so, the software represents an enormous percentage of total costs for the computer maker. As such, Microsoft is finding itself at odds with Moore's Law. Prices for technology have dropped, but office software has risen.

"Hardware [prices are] doing a good job of crashing through the floor," says Michael Robertson, CEO of Lindows, a company offering low-cost Linux-based desktop software to manufacturers. "What hasn't dropped is the cost of software. We're going backwards because of things like licensing and activation codes. The effective cost of software is actually going up."

Microsoft's insistence on its pricing model and ever-stricter licensing plans is opening the door for companies such as Corel, with its Word Perfect suite (remember that?). HP (HPQ: up $0.06 to $14.27, Research, Estimates) sure remembers it, and announced earlier this week that it would ship Corel with its entire Pavillion line of consumer PCs. Last week, Dell (DELL: down $0.43 to $26.72, Research, Estimates) announced it would be offering Corel WordPerfect Productivity Pack (the Corel equivalent of Microsoft Office) on selected models of its Dimension desktop and Inspiron notebooks.

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Microsoft doesn't appear too worried, telling "With over 300 million users worldwide, Microsoft Office has become the choice of individuals who need to be more productive and organizations who need a reliable set of tools to run their businesses."

Should the current economic climate extend even further than many are predicting it will, other non-Microsoft markets could open up, including Linux versions of desktop productivity software. Companies such as Lindows, Mandrake, and CodeWeavers have Microsoft-compatible software out now, but they're struggling to find a market.

One of the favorite pastimes of any technology watcher is to imagine scenarios in which Microsoft could be toppled -- if for no other reason than because it seems so damn invincible. These recent developments hardly signal the end is near for Redmond. But as history has proven, it's a bad idea to put yourself on the other side of Moore's Law, a place Microsoft finds itself now that PC prices have finally fallen below the cost of its software. Too many companies have fought the law, and the law has won.

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