Microsoft Is Quietly Losing This Battle

Chromebooks continue to march forward in the education market, leaving Microsoft and Apple on the defense.

Jul 21, 2014 at 5:15PM

Microsoft (NASDAQ:MSFT) has a lot of avenues it needs to improve on. Perhaps that's why the company's CEO Satya Nadella is laying off about 18,000 employees following the purchase of Nokia's mobile division. Though I'm a bit skeptical the mass layoffs are all that beneficial.

But the company's mobile ambitions aren't the only thing Microsoft should worry about. Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Chromebooks have successfully crept into the education market, and Microsoft doesn't have much power to stop the advancement.

Chromebook Google

Source: Google

Google as the underdog
Not too long ago Google would have been considered the underdog in the education market. Chromebooks have gone from just 1% of the K-12 computing market in 2012, to 19% in 2013. And these latest numbers show Google may be closing in even more on Microsoft's 28% share of the market.

The latest data from NPD Group shows that in the first five months of this year Chromebooks accounted for 35% of all channel notebook sales, and that sales of the inexpensive laptops spiked during the first few weeks of June. Meanwhile, NPD reports that Windows laptop sales remained "flat."

The most recent bump in Google's laptop sales comes as schools make purchases before the new school year starts. But it's not just NPD that's seeing a rise in Chromebook sales. Just last week Google said that it sold one million Chromebooks in Q2 2014.

Nothing to lose
Part of Google's strength in education is that it isn't focused on hardware sales, like Microsoft and Apple (NASDAQ:AAPL) are. Microsoft has recently announced plans for $199 laptops, likely to combat the rising sales of Chromebooks. The company will achieve this by encouraging original equipment manufactures to sell some Windows-based laptops at lower prices by lowering or eliminating the Windows licensing fee they pay to Microsoft.

Windows Chromebook
Microsoft's education website takes Chromebooks head-on. Source: Microsoft

Apple's iPad and MacBooks are coming under attack from Chromebooks as well. The cheapest iPad Mini sells for $399 and the lowest-end MacBook Air starts at $899. Even with an education discount, those prices don't come close to Google's -- or even Microsoft's -- pricing.

But Chromebooks have more than an initial cost advantage. If a Chromebook stops working, Google replaces the device at no cost to schools. The company also frequently updates its apps, as do Apple and Microsoft, but the simplicity and frequency make the process easy for education IT departments.

Foolish final thoughts
As Google increases its Chromebook sales in the education sector, Microsoft may start running out of strategies. The company can only persuade OEMs to lower prices so far, and in the end the PC makers will decide whether not making the cheap laptops are worth it.

Ipad Air

iPad Air. Source: Apple

Though Apple has conveyed it's not worried about Chromebooks, it should be. Google makes its money from advertising and getting users into its software app ecosystems. It doesn't make money from hardware sales as Apple does, so it can easily out-price Apple when selling to schools. Add on top of that free replacements for Chromebooks and it's easy to see why schools would opt for Google's laptops.

In NPD's report, the research firm said:

The next test for Chrome will clearly be the most difficult, as both Apple and Microsoft get more aggressive in pricing and deal making over the next few months. By the end of the third quarter we will have a much clearer picture of the long-term impact Chromebooks will have in the commercial channel.

According to Futuresource Consulting, global spending on educational technology in classrooms was $13 billion in 2013. Of that total, 62% -- a little more than $8 billion -- went directly to PC, tablet and notebook sales. Global classroom technology spending is expected hit $19 billion by 2018, with mobile PC sales the driving that growth. With those numbers, and increasing growth, it's clear why Microsoft, Apple, and Google all want to dominate the education sector. 

I agree that Apple and Microsoft won't cede the education space to Google very easily, but I find it hard for Apple, who is always thinking about margins, to stifle Chromebooks' advancements. Microsoft is trying, but with school systems constantly concerned about their budgets, it'll be hard for them to pass up a $200 Chromebook, with free software, automatic updates, and a free replacement plan. If Microsoft and Apple don't have a major change in course, the education sector may soon belong to Google.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), 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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