It was at the time mobiles were picking up momentum, and just before tablets arrived on the scene (the ipad launched 2010, the tablet focused Android 3 came out in 2011), and a lot of people migrated away from windows for their personal computing needs. There's also been MS's ultimately failed efforts for their own mobile platform. Besides the established huge momentum of gaming and professional/office usage it's difficult to see why consumers would move to windows, or what MS offers to prevent the momentum slowing and linux slowly chipping away at it.
Either way: people wanted what they knew, which was Windows, and they paid more for it. I wrote about this before: https://news.ycombinator.com/item?id=41431733
This is from a random contemporaneous TechCrunch article about the 2nd/3rd? gen offerings:
Eee PC 901 (Linux or Windows): $599 Eee PC 1000 (Linux or Windows): $699
https://techcrunch.com/2008/06/13/new-eee-pc-models-get-us-p...
I assume the Atom is faster(?) The XP machine felt slower though.
You're right and they effectively licensed XP to Asus for free for use on the Eee PC (which originally only shipped with Linux) when it was shaping up to be a hit.
This is a worthwhile watch if you're interested in this corner of computing history: https://www.youtube.com/watch?v=6bVno8dlM3E