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Microsoft Is Desperate to Crush Google's Chromebooks

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Microsoft (NASDAQ: MSFT  ) will cut Windows licensing fees on PCs that retail for less than $250, according to Bloomberg. The move appears to be in response to the growing popularity of Google's (NASDAQ: GOOGL  ) Chrome OS, which has received the support of nearly all of Microsoft's hardware partners, including Hewlett-Packard (NYSE: HPQ  ) .

Microsoft's aggressiveness is justified
Cutting Windows licensing fees is just the latest step in Microsoft's ongoing war against Google's operating system: In recent months, Microsoft has run multiple ad campaigns slamming Google's Chromebooks, urging consumers to stay away.

Microsoft's aggressive assault on Google's operating system has taken some by surprise -- despite rapid growth, Google's share of the traditional PC market is paltry, while Microsoft's Windows remains dominant. Last year, just 2.5 million laptops powered by Google's operating system were shipped worldwide, according to IDC -- about 1% of global PC sales.

But Microsoft's fear of Chrome OS is more than justified. Google's critics frequently cite the web-dependent operating system's many limitations -- without the ability to run local software, Chromebooks are unlikely to ever capture the lion's share of the PC market, at least not anytime soon.

But a single Chromebook sale is still one sale too many for Microsoft, as Chromebooks threaten virtually every part of Microsoft business. Unlike mobile devices, which might be thought of as supplementary, Chromebooks are substitute goods -- every Chromebook sold is a Windows sale that didn't happen.

The damage doesn't stop there. Owners of Chromebooks can't use Microsoft's full Office suite (unless they stream it from a Windows PC), resulting in even more lost revenue for Microsoft. Instead, they must rely on Google's competing Docs, along with Google's other web services. Given their deep integration, Chrome OS users are unlikely to use Microsoft's competing products -- I doubt many Chromebook owners search with Bing or use for their email.

Microsoft's hardware partners are switching sides
At the same time, while Google's share of the PC market may be small right now, it could continue to grow in the coming quarters. As I've written before, all of Microsoft's biggest hardware partners have jumped on the Chromebook bandwagon, and their support and marketing could drive further Chromebook adoption.

Hewlett-Packard in particular has been very supportive of Google's operating system, releasing three different Chromebook models last year, and more recently, a higher-end Chromebox aimed at enterprise users.

For about a year, Hewlett-Packard's CEO Meg Whitman has consistently referred to her company's "multi-OS" strategy. But while she may call it "multi," what she really means is that Hewlett-Packard is slowly moving away from its dependence on Microsoft's Windows, offering Google's operating systems (Chrome OS and Android) as an alternative.

It's easy to see why Hewlett-Packard would favor Google's operating systems: Google gives them away for free, resulting in higher margins for hardware manufacturers, and unlike Microsoft, Google doesn't compete when it comes to hardware. Last year, Whitman identified Microsoft as a "competitor," as Microsoft's Surface Pro competes with Hewlett-Packard's own Windows PCs.

Cutting Windows licensing fees could go a long way in winning back hardware partners like Hewlett-Packard. Having to pay Microsoft less on every PC would allow Hewlett-Packard to grow its margins, or to lower the price of its already low-cost PCs and compete for more market share. As most Chromebooks retail for around $250 or less, Hewlett-Packard may be less likely to promote Google's operating system.

Stamping out Chrome OS won't be easy
Most of Microsoft's failures over the last decade have been the result of inaction -- its inability to recognize what the iPhone and iPad represented, or to capitalize on search and social media early in their development. In that regard, Microsoft's willingness to aggressively target Google's Chrome OS before it's emerged as a truly viable threat is an encouraging sign.

Still, I don't think cutting Windows licensing fees on low-cost PCs will be enough to completely wipe out Chrome OS. A big part of Chromebooks appeal is their low cost, but it's more than that: If you can get over their many limitations, Chromebooks offer a better user experience than traditional Windows PCs, impervious to software degradation and traditional malware.

Ultimately, if it does succeed in wiping out Google's operating system, it may prove to be a pyrrhic victory. Microsoft, unlike Google, sells its operating system. If it has to almost give it away to stop Google, the Windows business becomes almost pointless.

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Read/Post Comments (8) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2014, at 3:03 PM, symbolset wrote:

    What does it say when the prevention of choice is assumed vital?

  • Report this Comment On March 03, 2014, at 12:22 AM, chilero wrote:

    "If you can get over their many limitations, Chromebooks offer a better user experience than traditional Windows PCs, impervious to software degradation and traditional malware."

    What? That is like saying if you can get over the fact that you can't do much of anything with them, they're great, much better than a laptop that doesn't have any limitations.

  • Report this Comment On March 03, 2014, at 7:27 AM, Advisor321 wrote:

    Got an HP 14 Chromebook for Christmas, and only touched my Windows machine twice since then. There's a reason Chromebooks are doing so well, and it isn't the price. It's the speed, hacking/virus/malware immunity and ease of use.

    I'm 44 years old, and have been using Windows computers since my first 286. I'm convinced that anyone who still thinks slow, buggy, virus and malware-prone Windows machines are the way to go have never spent adequate time with a Chromebook. You simply never have to wait to get anything to load on a Chromebook, period.

    Not to mention it's 2014...nobody should ever have to spend money on an OS version or common software like word processing and spread sheets.

  • Report this Comment On March 03, 2014, at 7:45 AM, Griff wrote:

    I' have had 2 Chromebooks in use in my home.for at least a little over a year now ..both the cheapest Acer units and both are still running fine ..

    5 -6 seconds to boot up and be running..

    No constant updating required

    My wife has not touched her "netbook since she received her Chrombook...and I have not had to spend the time keeping her netbook running...

    These things are inexpensive, they work fast, are not a hassle to maintain ...

    for simple web surfing and e-mail these things just plain function ...

    I sure wish Google combined Android with these things if they did that my iPhone would be replaced with an Android phone and iPad would be replaced by an Android tablet... (that may happen anyway)

    Bob G

  • Report this Comment On March 03, 2014, at 11:01 AM, badgerzilla wrote:

    To mankind, all of Microsoft's victories are Pyrrhic victories. Microsoft specializes in them. One the competition is gotten rid of then the prices will go up again and they will be more vigilant of crushing all choices other than what Microsoft makes. That company so reminds me of Nazi Germany and Hitler.

  • Report this Comment On March 03, 2014, at 1:22 PM, herbstoller wrote:

    Doesn't anyone (besides me) find that the MS proposed lower price is an anti-competitive attempt by essentially a monopolist to crush a potential competitor?

    I remember Netscape vs IE, Lotus 1-2-3 vs excel, wordperfect vs MS word. We are all worse off because MS eliminated competition. I am pleased that Google stepped up to challenge MS IE browser with Chrome and challenge MS Windows with Chrome OS.

  • Report this Comment On March 03, 2014, at 6:19 PM, chilero wrote:

    @herbstoller Except that the competitor is giving it away the OS for free. If lowering the price is anti-competitive, what would one call giving away a product?

    Giving the product away for free to stifle competition is what got Microsoft into trouble with IE and Mediaplayer. Google however has been able to it without an problems.

  • Report this Comment On March 03, 2014, at 7:34 PM, herbstoller wrote:

    But MS and Google have completely different business models. MS sought to eliminate the competition so that it could (and did) raise prices after the competition was eliminated. The Google model is to get you to use their (free) software so they can sell you eyeballs to advertisers. The customer has made the same 'deal' with Google that he made with over-the-air TV- free programs but you we have your eyeballs for ads. Google was forced to get into the OS business because of the possibility that a Windows/IE/Bing colossus would freeze out the Google search engine.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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