Why Chromebook Sales Have Microsoft Worried

Microsoft faces a new challenge to its Windows operating system as Google Chromebooks are growing in popularity in the United States.

Mar 13, 2014 at 1:10PM

First Microsoft (NASDAQ:MSFT) had to deal with falling PC sales as tablets surged in popularity. Now the market for its Windows operating system faces another challenge as Google's (NASDAQ:GOOGL) Chromebooks have made a startling jump in popularity in the United States.

CNN Money reported that Chromebooks accounted for 21% of U.S. notebook sales in 2013, according to Nomura Securities . The laptop-like devices that use the Chrome operating system instead of Windows still only had an overall 1% share of the global market, the study reported. But they are clearly becoming a growing threat to Microsoft in the U.S. and that could spread.

What's a Chromebook?

Chromebooks look like a laptop but instead of being full-function computers they are largely dependent on having an Internet connection. They run Google's Chrome operating system instead of Windows and use web-based apps instead of installed software. Offline the devices have some basic functionality (like simple word processing), but online they can can access Google's free suite of applications that mirrors the functionality of Microsoft Office.  

A Chromebook is limited compared to a Windows-powered machine, but for many users they meet the basic needs for a machine that's more than a tablet. They have keyboards, a little bit of on-board storage (for things like playing media while offline), and they are generally lightweight and fairly elegant looking. 

Amazon shows prices for new units starting at $199 with almost all Chromebooks coming in under $300. Samsung and Acer -- which both also make Windows-based notebooks -- manufactured the first Chromebooks with leading PC-makers Lenovo and Hewlett-Packard (NYSE:HPQ) joining the fray in 2013.

Chromebooks and the Chrome OS may not be huge yet, but they offer both consumers and the partners who were once entirely reliant on Microsoft an alternative at a lower price than most Windows notebooks.

Microsoft attempts to fight back

Microsoft clearly saw Chromebooks as a threat since it began running ads last year during the NFL playoffs that poked fun at the low-powered machines. In the extended version of the commercial, a woman is shown attempting to sell a Chromebook at a pawn shop with the shop's buyer pretty much ridiculing the device.

"Because Chromebook applications are web-based, when it's not connected it's pretty much a brick," said the pawn shop employee in the ad. After pointing out some more negatives to the device, he points to the Google Chrome logo and tells the potential seller "you see this thingy? That means it's not a real laptop."

The ad is amusing but, judging by the increase in Chromebook sales in the U.S., not particularly effective.

Microsoft has to do something

Windows remains a huge part of Microsoft's business bringing in more than $18 billion in revenue, a slight decrease from 2012. That's not a great result since the release of a new version of Windows usually brings a one-time boost for the division. It's still a large chunk of business that's being assaulted by tablets running Apple's (NASDAQ:AAPL) iOS and Google's Android, as well as the new Chromebook threat -- Microsoft has to try to defend its market share.

The market for traditional PCs (the kind that run Windows) has declined and it's unlikely to recover. The explosive growth of the tablet market has clearly shown a variety of one-time traditional desktop or notebook users that they don't need a PC as much as they used to. 

According to IDC's Worldwide Quarterly PC Tracker, Global PC in the fourth quarter of 2013 dropped by 5.6%. For the full year 2013, unit shipments declined 10% from 2012, a record drop, IDC reported.

Microsoft may have the right strategy

Making fun of Google's Chromebooks (and Google in general) through the Scroogled ads won't work and may actually backfire. The anti-Chromebook ads are very specific as to what Chromebooks do. For anyone looking for a device that offers those features, they serve as an introduction to a potential PC alternative.

Where Microsoft is doing the right thing is in creating fully featured Windows 8 devices that compete with Chromebooks on pricing. Microsoft has dropped the cost of licensing Windows 8 to its OEM partners for devices that cost under $250. This should lead to an influx of Windows-powered notebooks that compete with Chromebooks on price.

Take away the price advantage and the limits of a Chromebook become obvious. Even if the new generation of sub-$300 Windows machines are lower-powered than their more expensive cousins, who would choose a device running Chrome that requires an Internet connection when they can buy a similar notebook at a similar price that's actually a computer?

Microsoft's ads may prove to be ineffective, but its business strategy of making Windows available across a broad range of laptops, desktops, hybrids, and tablets will ultimately pay off.

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Daniel Kline is long Microsoft. He owns a Surface, two Dell Notebooks running Windows, and a MacBook Air, but not a Chromebook. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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