Microsoft is aggressively pushing a new low-cost version of its operating system intended for use with "ultra low cost PCs," competing with Linux on machines like the Eee and the One Laptop Per Child XO. However, Microsoft isn't willing to sell the low-cost license to any ULPC -- rather, the company has set out onerous conditions governing the maximum spec of these machines: 10.2" screens and no more than 80GB of storage, and no touch screens allowed.
Microsoft is trying to distort the market for cheap, tiny laptops by setting up artificial incentives to manufacturers to limit the power and capability of their lowest-cost units -- even if a vendor can figure out how to put more storage, a bigger screen, or a touchscreen into its machines, Microsoft doesn't want it there, and they'll punish any vendor that tries by refusing to license XP Home Edition on the same preferential terms that lower-spec machines get.
The key term here ls "Ultra Low Cost" -- note that this is not the same as "Ultra Low Spec. The primary market for these super-cheap machines are kids and poor people, and they'll be the collateral damage in Microsoft's crusade. If Microsoft wants to set up a licensing program for low cost machines, then cost should be the limiting factor, not power.
But this isn't entirely bad news: at least this latest move provides incentive to vendors to continue to bundle GNU/Linux, not Windows, on their machines. After all, Linux isn't just cheap, it's free, and no one's going to slap you around for figuring out how to deliver more power and a better machine.
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