Can a Cheap Windows 8 Laptop Kill Google's Chromebook?

Chromebook has earned market share largely due to price. Can Microsoft make its competition go away by offering a touchscreen Windows 8.1 laptop for under $200?

May 13, 2014 at 7:14AM

Microsoft (NASDAQ:MSFT) sold a touch-screen laptop running Windows 8.1 in its physical and online stores Tuesday for $199. This could be an attempt to gauge whether it can offer an alternative to Google's (NASDAQ:GOOG) Chromebooks, some of which sell for under $200.

During the one-day sale, customers could purchase an ASUS (NASDAQOTH:AKCPF) X200-MA touch laptop for $199 either online or in the company's retail stores in the United States, Puerto Rico, and Canada. The laptops were offered in in black, blue, or white, and all three colors were sold out on Microsoft's store as of the early morning on the East Coast. The company touted the promotion in a blog post on its website saying that it would last a day or "until quantities run out."

Microsoft did not say how many laptops it had for sale on its website or in its retail stores. 

Best Buy (NYSE: BBY) has the same ASUS model on sale for $279.99 on its website,  while other sites have models with similar specs for $299 and up. ASUS does not sell directly from its website not does it list prices.

An answer to Chromebooks?
Google's Chromebooks are an interesting attempt to disrupt the laptop marketplace, and in some ways it's working. Chromebooks are limited-function machines that look like laptops and run Google's Android operating system. The devices are largely dependent on having Internet access, and they don't run traditional programs. Instead, they rely on Google's suite of apps including its knock-offs of Microsoft Office's word processor, spreadsheet, and presentation programs. 

Chromebooks have been a hit so far. Through November 2013, the devices accounted for 21% of all notebook sales, up from a negligible share in the prior year, and 8% of all computer and tablet sales through November, up from one tenth of a percent in 2012. This is the largest share increase across the various product segments, according to a report from NPD Group.

The low-cost laptop has also captured a significant share of the education market, with Chromebooks accounting for a fifth of all mobile devices shipped into U.S. K-12 education in the third quarter of 2013. That number grew to one in four in the fourth quarter, according to Futuresource Consulting.

"Chromebooks present a number of benefits to the education market, which go further than just offering cheaper hardware," said Phil Maddocks, market analyst at Futuresource. "While savings can be made on the cost of the hardware alone, the majority of the cost savings originate from within infrastructure and device management. As Chromebooks are cloud-based devices, the security, device management, and even core content creation apps such as Google Docs are run in the cloud, which produces cost reduction on both managing and setting up the devices, as well as some software licensing costs."

Chromebooks do less than traditional laptops (and a lot less than the touch-screen Windows 8.1 ASUS machine Microsoft sold for $199), but they are the cheapest solution available to schools for a machine that offers a laptop-like experience. It's possible that Chromebook's market share was won almost solely on price, and an alternative running Windows and all of Microsoft's familiar software could be an instant success. Of course, that won't change the fact that a number of school systems have committed to Chromebooks in recent years; those schools are unlikely to scrap their investment to jump back to PCs.

Microsoft sees the need for cheaper laptops
At the Mobile World Congress in Barcelona in February, Microsoft's vice president of operating systems, Joe Belfiore, laid out some of the company's strategy for Windows 8. He also explained its commitment to working with partners to deliver cheaper devices. 

"We are committed to making Windows the best place for our partners to build great devices. Today that means different screen sizes, input methods, connectivity needs, and usage scenarios," he said. He added "We'll enable our partners to build lower cost hardware for a great Windows experience at highly competitive price points."

Microsoft gave those words some teeth when at around the same time, Bloomberg  reported that the company planned to cut prices for Windows licenses for devices that cost under $250 with no restrictions on the size or type of device. That lowers the cost from $50 to $15 for a Windows license, a move that should make it easier for Microsoft's partners to be price competitive with machines running Google's free Chrome OS. There have also been rumors that Microsoft is testing an ad-supported version of the OS called "Windows 8.1 with Bing," which could remove Android's pricing advantage entirely.

Chromebooks are a compromise
In launching Chromebook Google saw an opportunity to offer laptop-like functionality at a very low price. Since the devices had a keyboard, Chromebooks make sense as a laptop alternative whereas tablets do not. To get to a $199 price point Google had to compromise on features.

If Microsoft can regularly offer a sub-$200 touchscreen laptop, that could be a game-changer. It's hard to imagine many consumers choosing a Chromebook over a machine running a full operating system. Yes, Windows 8.1 has its detractors, and you could make an argument for Chromebooks vs. a non-touch Windows 8.1 laptop. Once you add touch there is no comparison, though. If this is a test by Microsoft to gauge interest then the fact that the website sold out quickly suggests there is demand.

If a sub-$200 Windows machine becomes standard, Chromebook's dominance of the bottom end of the laptop market will end. The only question left is whether there is a place for Chromebook at all in a world with Windows laptops at that price.

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Daniel Kline is long Microsoft. His company almost ordered three Chromebooks last month but opted for Windows 8 laptops (non-touch) that were under $300. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares) 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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