Microsoft is seeking to limit the effectiveness of ultra low-cost PCs (ULPCs) such as the Asus Eee PC in an attempt to stop the devices taking business away from more powerful Windows-based machines.

The company is looking to offer PC manufacturers large discounts on Windows XP Home Edition to encourage them to use the operating system instead of Linux on ULPCs. To be eligible, however, the PC vendors that make ULPCs must limit screen sizes to 10.2 inches and hard drives to 80GB, and they cannot offer touch-screen PCs. The programme is outlined in confidential documents that Microsoft sent to PC makers last month.

Imposing the limitations solves a number of problems for the PC industry, said industry analyst Roger Kay, president of EndPoint Technologies Associates. "It allows PC makers to offer a low-cost alternative, and it prevents eroding of pricing and margins in the mainstream OS market," he said.

Microsoft declined to comment on the documents. "We don't speak publicly about our agreements with [PC makers]," the company said in a statement.

ULPCs are an emerging class of laptops that carry low price tags. The systems already have limited hardware configurations. Microsoft's programme appears designed to ensure that distinction is maintained and to prevent ULPCs from cannibalising sales of higher-end systems, Kay said.

Twenty or more other designs are expected to enter the market over the next six months, and Microsoft expects 10 million to 13 million of the devices to sell this year, according to the documents. IDC's forecast is more modest: On Thursday it said it expects ULPC sales to hit nine million units by 2012, up from 500,00 last year.

Microsoft notes that the OSes under consideration for the devices include Windows and Linux. Some PC makers have expressed a preference for Linux because it helps them keep down the cost of the devices.

The company said that PC makers were keen to enter the market but wanted to keep ULPCs as a distinct category from "value" and mainstream PCs. The company's new programme, scheduled to launch by the end of June, had been designed to help make that happen.

Microsoft plans to charge PC makers US$26 for Windows XP Home Edition for ULPCs sold in emerging markets such as China and India, and $32 for those sold in developed markets, the documents show. PC makers who are eligible for its Market Development Agreement, however, can get a discount of as much as $10 off those prices, the documents say.

That's where the hardware limits come in. Besides limits on the screens and hard drives, to be eligible, the systems can have no more than 1GB of RAM and a single-core processor running at no more than 1GHz. The programme makes an allowance for some chips, including Via Technologies' C7-M processors, which run between 1.0GHz and 1.6GHz, and Intel's upcoming Atom N270.

By offering Windows XP Home Edition at bargain prices, Microsoft hopes to secure its place in the ULPC market and reduce the use of Linux, according to an official at one PC maker, who asked not to be identified because he was not authorised to discuss the programme.

"[Low-cost PC makers] have made some good inroads with open-source, and Microsoft wants to put a stop to it," the official said.

The official did not seem opposed to the programme. It should stimulate more competition between Windows and Linux in the ULPC market, and it could invigorate sales because consumers who want an easy-to-use PC are likely to prefer Windows, the official said.

Is Microsoft trying to neutralise the danger of GNU/Linux-based ultraportables with this move? Find out more in this related blogpost by Glyn Moody, on our sister-publication Computerworld UK.