Microsoft (NASDAQ:MSFT) was slow to recognize Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Chromebook as a challenger positioned to steal significant market share from its Windows operating system, primarily due to price.
That allowed the search giant to snatch away business from the long-dominant PC player, specifically in the education market and among people looking for a cheap secondary device. Microsoft got complacent and underestimated how important price is to consumers. Chromebooks may do way less than a machine running Windows, but for many, they do enough to be a good value at prices that start below $200.
Microsoft allowed Google to take a surprisingly big chunk of business, and now the company is looking to take it back. The Windows maker, which has dabbled with special offers designed to compete with Chromebooks, has now worked with its partners to take aggressive pricing steps to target potential buyers of the laptops running Chrome OS.
But has Microsoft waited too long? Chromebooks grew quickly since they were launched in 2011. They accounted for only 1% of total global notebook sales last year, according to Nomura, but they appear to be gaining traction.They accounted for 21% of commercial U.S. notebook sales last year, according to NPD, which defines commercial sales as those to business and education. The Google machines have been particularly strong in the education market.
What is a Chromebook?
Chromebooks are machines running Google's Chrome operating system. They have the form factor of a laptop but are very limited compared to a machine running Windows or Apple's iOS operating systems. Chromebooks are heavily Internet-dependent and use Google's suite of online productivity software. They boot up quickly, have long battery life, and are useful when online, but much less so when not. Chromebooks work well for basic browsing, word processing, and other simple functions, but they can't run regular software.
What is Microsoft doing?
Microsoft went after Chromebook in a series of TV commercials in 2013. Those ads, however, focused on features -- what Chromebooks couldn't do and Windows PCs could. The ads missed the mark because consumers -- specifically those buying for the education market -- weren't buying the cheap Google devices to run high-end software. They were buying them as Internet-browsing machines that could handle some basic computing tasks.
Microsoft was right about everything, but the company had entirely missed what buyers wanted. Now the Windows maker is using price as its calling card as it directly appeals to consumers to buy Windows laptops over Chromebooks. The company sent out an email last week to its Microsoft Store mailing list with the subject line "Better than a Chromebook."
The email begins with big type that touts the ability to run Microsoft Office and Adobe Photoshop -- things that Chromebooks can't do. It continues by taking a direct shot at Chromebook. "Windows 8.1 laptops can do everything a Chromebook can do, plus so much more."
Most important, the email ended with an ad for the Asus X551MAV, a $249 laptop with a 15.6-inch screen, 500GB hard drive, and "up to five hours of battery life." The email also has a link to a Microsoft Store page that showcases a number of laptops at that price, including models from Dell and Acer. The promo text under the Acer Aspire E 15 ES1 describes it as "affordable like a Chromebook, but with a 500GB hard drive and a 15.6-inch display."
Microsoft clearly understands the threat Chromebooks represent and is firing back by offering better computers at comparable prices.
Is it too late?
In the overall market, Chromebooks have just started to make inroads, and heavily publicized, cheap Windows laptops may well arrest that momentum. It's hard to imagine someone testing out various laptops at a Best Buy and choosing one running Chrome over ones running Windows if the price is comparable. Microsoft has been aggressively supporting its OEM partners that make cheaper machines, lowering the price of Windows to free in some cases. If the company makes sure the existence of those machines is well-known, it may very well kill Chromebook as an alternative for individual buyers.
The future is less certain in the education market, where Chromebooks in the fourth quarter of 2013 reached a 25% market share, according to Futuresource Consulting. That's an impressive number that likely came from Microsoft's user base, as the same research showed Apple steadily holding just under 50% of the market.
With Chromebooks entrenched in a quarter of the schools in the United States, it may not be easy for Microsoft to get them out, as product replacement cycles can be very slow. Most school districts that invested in Chromebooks are unlikely to trash them and switch to Windows machines just because cheaper ones now exist. Microsoft may regain its market share in that segment, but it could take many years.
Chromebooks are a better buy than Windows machines only if they are cheaper. By eliminating that advantage, Microsoft should be able to greatly weaken demand for Chromebooks ... finally.
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Daniel Kline is long Microsoft and Apple. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple, 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.