FAM Microsoft is betting ultra-thin laptops can steal business from netbooks and Apple this Christmas while providing the opportunity to sell more expensive copies of Windows.

Speaking at Microsoft's annual Financial Analyst Meeting in Redmond, Washington, chief executive Steve Ballmer told investors that Microsoft, Intel, and PC makers "screwed up" by not delivering "cool" low-price, lightweight, high-performance laptops.

Instead, he said, we have netbooks that do well on price, power, and "cool" factor, but fail on "super-small" screen and keyboard size.

Ballmer promised a range of ultra-thin laptops from PC makers in time for Christmas, for customers who want a full-size screen and keyboard when shopping for a netbook.

Netbook users can also look forward to price increases on Windows.

Ballmer said Microsoft had got it wrong by selling low-priced Windows - Windows XP - on netbooks. These run Windows XP and account for 11 per cent of Microsoft's PC business, but Microsoft's tactic of using low price to win market share against Linux has hurt its revenue.

With Windows 7, Ballmer vowed prices would go up, and Microsoft had a "great chance" to up-sell customers. It sounded like the upsell will come from Windows XP on netbooks to Windows 7 on netbooks and from Windows 7 on netbooks to Windows Home Premium on ultra-thin machines.

"In Windows 7, we are going re-adjust those prices north," Ballmer told analysts looking for the bottom line and dismayed by the impact of netbook sales on Microsoft's business. "With Windows 7 SKU line up, we have a great chance to do some upsell to Windows 7 Starter and Home from XP."

Windows 7 Starter Edition is destined for netbooks and it's been reported this will be priced between $45 and $55 per unit compared to $25 and $30 for Windows XP Starter Edition. Microsoft does not reveal pricing on Starter Edition and has refused to comment on pricing for the Windows 7 edition, but Ballmer's comment appeared to confirm the Windows 7 Starter Edition price is going up.

Windows 7 Home Premium, meanwhile, has been tagged at $119.99 for an upgrade and $199.99 for a new copy.

Microsoft will attempt to offset increases with the added frills of Windows 7 and the bigger screen size, keyboard, and cool factor of ultra-thin laptops.

"When a customer says we want a netbook with bigger screen we will say here's an ultra thin," Ballmer said. "We want people to be able to get the advantages of light weight performance and be able to spend more money with us and Intel and Dell and HP and others."

Ballmer singled out the potential threat from Apple, Google's Android, and Linux on netbooks. According to Ballmer, Windows has the advantage in that Windows offers a "fixed design point" unlike Linux that the ecosystem of partners can work on.

Ballmer almost let his lip come unzipped on the subject of alleged Intellectual Property (IP) violations in Linux, when he said Linux claimed to be free whereas customers and OEMs pay for Windows. "But we know with IP and other things, they have a price," he said.

On Apple, Ballmer promised the ultra-thin laptops would defuse attacks from Apple, which has dinged Microsoft for not being cool. "The predominant attack is: 'We have the coolest hardware.' When you see the hardware the PC designs that will come out this Christmas with Windows 7 that conventional wisdom will begin to change," Ballmer said.

Significantly, Ballmer highlighted delays to Google Android laptops and said he doesn't understand Google's planned Chrome operating system. Still, he made a point of saying while Chrome might implement standards like HTML, standards lag the pace of innovation from companies like Microsoft.

"Just as rich graphics come to HMTL it'll [innovation] be about touch," Ballmer said.

Picking up the baton from Ballmer, Microsoft's chief operating officer Kevin Turner speaking afterwards said Microsoft is attacking Linux netbooks in the retail channel by focusing on customer returns. Turner claimed returns, which cost the retailer money, on Linux netbooks are four to five times higher than those running Windows.

On Apple, he provided a few more details on Microsoft planned retail stores due this fall: Microsoft will open two stores that will offer customers better service than currently available when buying a PC or Windows. It also seems Microsoft will attempt to push Windows as a lifestyle concept on PCs, phones, and TVs. ®