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Microsoft (NASDAQ: MSFT ) CEO Steve Ballmer was once asked about Chrome OS, Google's (NASDAQ: GOOGL ) cloud-based operating system. It was 2009, and Chrome OS had just been announced. Ballmer laughed.
With Ballmer announcing his retirement, Microsoft remains in a state of flux. Most observers -- including those at Microsoft -- acknowledge that mobile devices have cannibalized the traditional, Windows PC. But tablets don't work for everyone. Does that mean there will long be a need for traditional workstations, and thus, Windows?
Maybe not. As more PC OEMs introduce Chromebook models, and more software heads to the cloud, Chrome OS could eat away at Windows' base of traditional PCs.
Chrome OS vs Windows
In many ways, Chrome OS is far superior to Windows. It's lighter, faster, and impervious to viruses. Chromebooks boot almost instantly, and there's never a need to install software updates. Most importantly, it's cheap. Samsung's Chromebook starts at just $249. Perhaps that's why it's been Amazon's top-selling laptop since January.
Of course, there are limitations to using Chrome OS. As its name implies, it's hardly an operating system in the traditional sense of the word -- it's more or less just the Chrome browser. That means it's incapable of running traditional PC apps.
Software moves to the cloud
That sounds terrible. After all, what's a PC if it can't run apps? Yet, Chromebooks are surprisingly competent. Over the last few years, companies have brought more and more of their software to the cloud, making it accessible to anyone with a web browser.
For example, while Chrome OS can't run Microsoft's Office suite, there's always Office Web Apps, a stripped-down version of Office that can be run right in the browser. At the same time, the growing popularity of cloud-based enterprise apps, like Salesforce's CRM, are easily accessible to business users. Even Autodesk's AutoCAD can be accessed with a Chromebook, assuming one signs up for the company's new subscription plan.
This trend remains in its infancy, but it's one that's likely to grow in the coming years. Keeping software in the cloud has numerous advantages, particularly to the companies that develop it. Even Microsoft would like to see more applications make their way to the cloud -- Windows Azure, Microsoft's infrastructure as a service, benefits from the trend toward cloud computing. It's why hedge fund ValueAct, now on the verge of getting a board seat, invested $2 billion in Microsoft.
PC OEMs backing Chrome
Besides the aforementioned Samsung, other major PC OEMs, such as Hewlett-Packard (NYSE: HPQ ) and Acer, have introduced Chromebooks, while Asus is planning to sell one later this year.
Asus' CEO said that he believes Chrome OS could be popular among governments and educational institutions, as well as some business users. As demand for Windows PCs declines, Asus hopes its support of Chrome OS will offset that to some extent.
HP is banking on something similar. Last month, HP shares plunged after the company reported disappointing earnings. As one of the largest PC makers in the world, the decline of the Windows PC has hit HP especially hard. Sales of HP's PCs fell a stunning 22% on a year-over-year basis.
HP CEO Meg Whitman has been talking up Google's operating system. As Business Insider's Julie Bort noted, Whitman has avoided mentioning Windows specifically, instead promising to a build a company based around "multiple operating systems." Overall, HP's relationship with Google has been intensifying -- the two announced a partnership in June that has HP selling Google's Apps alongside its own hardware.
Could Chrome OS supplant Windows?
Right now, it might sound like a stretch, but Google's Chrome OS could supplant Windows as the dominant traditional PC operating system. Chrome OS excels in a number of ways, most notably price, but has major limitations.
Because it is more of a web browser than a traditional operating system, users of Chrome OS are limited in the software they can access. Yet, in just the last few months, the popularity of cloud-based software has exploded, and applications as complex as AutoCAD can be accessed with a Chromebook. Meanwhile, PC OEMs, such as HP, are looking to Chrome OS to help them offset the decline of their Windows business.
As a percentage of Microsoft, Windows is still substantial, generating about one-fifth of Microsoft's revenue and one-sixth of its operating income. As mobile devices cannibalize PC sales, most observers might expect the Windows division to shrink further. But that's putting it lightly. Should Chrome OS take off, Windows could fade into total irrelevancy.
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