1) What intel/MS want: To sell more high end products driven by their symbiotic "each new Windows release will have much higher hardware requirements" arrangement. Quad Core CPU + Win Ultimate = $$$$!
2) What people want: Small, cheap computers for accessing the web and maybe editing a few documents. Small, low powered Linux device sans Windows Tax = Far less $$$ for intel, none for MS.
When people start getting access to #2, Microsoft flies into a panic and dusts off XP to ensure that the unwashed masses are not exposed to that filthy Linux, just in case the find out they like it.
The problem is that Netbooks dont have the hardware to cope with even a legacy MS OS from 2000, despite being perfectly capable of running most Linux distros from 2009.
Solution: bump up the hardware specs of netbooks to allow XP to run.
Result: People see the new bastardised "netbooks" as "little notebooks" and begin to prefer them over their more expensive cousins for a number of reasons.
Problem #1: Intel's precious high end i7 sales are now being undermined by low end Atom sales because people really don't need that much power in notebooks.
Problem #2: Come Windows 7, MS high end Windows "Ultimate" sales will be undermined by low end sales of Windows Starter Edition.
Solution: Use monopoly control of the market to enforce arbitrary restrictions on products in the "netbook" market. In other words cripple netbooks to push people towards more expensive notebooks.
Result: Bastard Netbooks are more expensive in order to accommodate Windows requirements, have lower battery life, are less robust and are functionally crippled. They are still currently popular because they are the only way you can still purchase XP.
Problem: People still want cheap and cheerful devices but they are no longer able to buy them. When Win7 hits, it remains to be seen whether people will still want to buy machines loaded with crippleware.
Solution: ARM based netbooks loaded with ChromeOS and Ubuntu Netbook Remix arrives.
Result: Microsoft can no longer support ARM processors with their mainline Windows codebase due to the massive amounts of inter-dependancies that the bloated spaghetti monster called Windows has evolved in to. The best they could hope for is to port WinCE to the new netbooks. Intel too have no comeback because ARM have been making ultra low powered CPU's for the embedded market for a LONG time and intel have consistently failed to match them, despite numerous attempts to do so.
I can't wait to see this play out, it should be fun.