There are several reasons for this. A whole slew of inexpensive sub-laptops, commonly called UMPCs (Ultra Mobile Personal Computers), in the $200-$300 range. The profit margins on such devices is very small. Linux is free, and using it instead of Windows increases the profit margins for manufacturers.
Windows Vista also has a problem with UMPCs - it doesn't fit! It's memory requirements are too big, and can't be scaled down. But Windows XP can, and a scaled down version of XP has been made to compete with Linux in the UMPC market. Linux is still free, but XP has name recognition, and may keep Microsoft in the game on the lower end of the PC market.
With higher end computers, Microsoft has been losing market share to Apple. Thats been bad for Microsoft and PC manufacturers, who are also looking at Linux as an alternative to offer their customers who do not want Windows Vista. MS is still pushing Vista, but many people would rather have XP. There are plans for a service pack 3 for Windows XP, and some people are saying MS may be forced to continue supporting XP, because it is currently the most popular version of Windows.
Of all the versions of Windows I've used, I'd have to say XP is my favorite. It's not perfect, but it's been the most stable I've used and has had the least hardware and software compatibility problems. IMO, MS should have continued selling PC's with XP and Vista concurrently, giving customers a choice. They had an overlap period with Windows 98 and XP, and they should have done that again with XP and Vista, till the bugs in Vista were worked out. Instead they tried to force Vista on people, and now it's costing them market share as people turn to alternatives.
You can read more detailed analysis of these issues in the following articles:
Microsoft To Give XP Stay of Execution - for Budget Laptops
What do you do if your flagship operating system isn't designed to run well on a popular new class of hardware? It's a problem currently faced by Microsoft. Budget laptops like the Asus Eee PC with minimal amounts of RAM, relatively slow CPUs, and solid state storage have proven popular, and Vista wasn't designed to operate well within such hardware confines. In response, Microsoft is reportedly planning to extend the availability of Windows XP for the budget laptop category.
[...]
According to a report from InfoWorld, Microsoft is expected to make XP's stay of execution for budget laptops official later this week. A version of the Asus Eee PC with Windows XP is due to hit the market later this month, and early indications are that it will run XP just fine.
There has been a lot of resistance to Windows XP's imminent demise, with InfoWorld circulating a petition in an attempt to convince Microsoft to relent. XP is by far the OS with the largest installed base in the world; users and administrators alike are comfortable with it and some would love to continue using it indefinitely. [...]
Cheap Machines Give Linux Foothold in Desktop-PC World
[...] Laptops under $400 are real possibilities now, and some of the most buzz-worthy use Linux, such as Asustek Computer Inc.'s EeePC and the One Laptop Per Child Foundation's $200 "XO" computer for schoolchildren.
Linux also is available on slim little "netbooks" being pushed by Intel Corp.
Not only is Linux essentially free to the PC vendor, but the operating system also is better suited than Vista for cheap PCs' spartan hardware designs.
(Windows XP is available on scaled-back PCs like Intel's Classmate, but it's unclear what will happen after Microsoft soon stops selling XP to the general public.)
Amazon.com's top-selling PCs include several Asustek Linux machines.
Although Wal-Mart Stores Inc. recently stopped a test run of selling Linux PCs in some stores, the company says it will continue to offer them online.
Business computing suppliers are finding open-source desktops especially gaining traction in cost-conscious developing markets. [...]
Linux's Impact: The Return of XP
[...] "In the long run," Jim Zemlin, executive director of the Linux Foundation, told me in a recent conversation, "as hardware prices continue to come down and the cost of the operating system makes up more of the cost, Linux simply offers hardware vendors better margins. Thanks to that alone, Linux must continue to gain market share."
Microsoft, however, seems to have been waking up to the fact that it's stuck between Linux on the low end and Mac OS on the high end. It seems all but certain that Microsoft is going to keep Windows XP alive longer than it had planned.
That's the bad news. Microsoft had first planned to start taking XP out of circulation on June 30. Compared with Vista, or ME II as some of us have taken to calling it, Linux has been making serious inroads. XP, however, remains popular. XP Service Pack 3, whenever it comes out, is Microsoft's best Windows ever. [...]
This last article also has details about "Atom", which is not only Intel's smallest chip to date, it also only uses only 2.4 watts compared with today's average laptop, which uses 35 watts. It performs exceptionally well with Linux. Read the details, it may be one of the next Big Things.
Microsoft has some real competition now. Thank goodness. It can only benefit the consumer.
UPDATE 11:30pm:
It's official, no reprieve after June 30:
Microsoft Windows XP Dies June 30, as Planned
They will stop selling it after June 30th, they will still support it for a while yet. MS feels that those that want it have plenty of time to buy it over the next couple of months. But it will be still offered on low-end UMPCs:
[...] Windows XP Home and Starter editions will still be preloaded on ultra-low-cost PCs through June 30, 2010, or one year after the launch of the next version of Windows - whichever comes first, the company said. [...]
That's interesting. Are they expecting the "next version" of Windows, post-Vista, to be able to fit on both low-end and high end machines? They certainly aren't committed to keeping XP for UMPCs past 2010, though a lot could happen between now and then. I suppose we shall see, eventually.
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