Microsoft tries to battle free with cheap. It won't work
Microsoft is using the wrong strategy to beat open source. It won't work.
Microsoft, making the same mistake that Oracle made a few years ago with its low-end Oracle 10g Express Edition database, has decided that the best way to hold off open source nipping at its heels is to create a portfolio of low-end, cheap products.
It won't work. Microsoft provides compelling value, but this is not it. "Crappy but cheap" is not a compelling value proposition against open source, which already has an array of software that fits that model (just as there's lots of cheap but crappy proprietary software out there already).
Microsoft gets it right in its annual report: The way forward for Microsoft is to continue to provide a broad portfolio with (more-or-less) tight integration between the products. That's what will continue to position Microsoft well against open source, which tends to be a disparate array of non-integrated point solutions. It won't always work, but it will work for the near term.
Crappy but cheap? It isn't going to stop open source. Open source wins, in part, because it's cheap, but anyone that has run Linux, Apache, Zimbra, etc. knows that there is plenty of open source that wins because it is awesome...and just happens to be cheap as an added benefit.