Will New Google Chromebooks Wound Microsoft and Save Samsung?

Chromebook sales could triple by 2017. Could that jarring market shift make a serious dent in Microsoft and save Samsung?

Aug 14, 2014 at 12:51PM

Chromebooks, the low-end laptops that run on Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Chrome OS, are taking over the world. Research firm Gartner expects global sales to surge 79%, year over year, to 5.2 million units this year, then nearly triple to 14.2 million units by 2017.

Samsung (NASDAQOTH:SSNLF) is the leading manufacturer of Chromebooks, with a 65% market share. Microsoft (NASDAQ:MSFT) should certainly be worried. Gartner expects global desktop and laptop sales -- Microsoft's bread and butter -- to fall from 296 million units in 2013 to 262 million units in 2015.

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Chromebooks. Source: Google.

Why Chromebooks could put a hurt on Microsoft
Chromebooks are attractive for three simple reasons -- they're cheap, beefy enough for everyday tasks, and use a free OS loaded with free apps. Those apps tie into Google's cloud-based ecosystem, making it a seamless transition for Android handset or tablet users.

Back in 2006, Bill Gates mocked MIT's $100 laptop, which was backed by Google and designed for developing countries. Gates was particularly critical of the device's "tiny screen" and its lack of a hard disk, according to Reuters. Even though Gates was no longer Microsoft's CEO at the time, his distaste for lower-end devices reflects the tech giant's attitude.

Microsoft still believes that high productivity comes at a high price, as seen with the Surface Pro 3, which costs up to $2,000. Its hardware partners echoed that philosophy with Ultrabooks, most of which cost over $1,000. But the fatal flaw in Microsoft's plan is that it targets Apple's MacBooks -- which only account for 4% of the PC market -- instead of the lower-end market.

Under Steve Ballmer, Microsoft believed that it could always keep customers on a tight leash with Windows and Office. Yet Google cut that leash with the free Chrome OS, which hardware makers -- still burned by Windows 8 -- were eager to try out. Google also launched Google Docs as a free alternative to Office, which forced Microsoft to introduce Office Online, a free, cloud-based version of Office.

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Microsoft's Surface Pro 3. Source: Microsoft.

When push comes to shove, Google can afford to give away Chrome OS and apps for free. Microsoft can't. Google uses Chromebooks the same way it does Android devices -- to generate revenue from web searches and ads, and to keep users tethered to its ecosystem. Microsoft, on the other hand, relies on Windows and Office for 19% and 28% of its annual revenue, respectively.

Microsoft Office remains the leader in enterprise, with a 90% market share. But Gartner forecasts that usage of Google's cloud-based ecosystem could rise to 50% over the next decade, thanks to its popularity among students and small businesses. At least Microsoft is owning up to its mistakes -- COO Kevin Turner recently announced that Microsoft had partnered with Hewlett-Packard (NYSE: HPQ) to launch a $199 laptop to take on Chromebooks by the holidays.

Why Chromebooks could save Samsung
While the Chromebook has certainly become a thorn in Microsoft's side, it could be a blessing for Samsung.

Samsung was one of the first companies to launch Chromebooks in 2011. Sales were sluggish at first, with only 400,000 Chromebooks shipped in 2012. But in 2013, sales surged to 1.76 million units, according to NPD. If sales really hit 14.2 million by 2017 and Samsung retains its 65% share of the market, the company could ship 9.2 million Chromebooks to generate $200 million-$300 million in annual revenue.

That's a drop in the pond compared to the 314 million smartphones that IDC believes Samsung shipped last year, but there's a key difference -- Samsung's Chromebook sales are rising by the triple digits, while smartphone sales are peaking.

Samsung's smartphone shipments of 74 million units -- per IDC -- last quarter missed market expectations for 90 million units, despite the launch of its flagship Galaxy S5. The company's net profit also fell 20% over the prior-year period due to increased competition from low-cost Chinese competitors like Xiaomi. Chromebooks won't solve these problems overnight, but they could help Samsung become less dependent on its mobile division, the company's largest business segment, which generates half of its annual revenue.

The Foolish takeaway
The rise of Chromebooks proves two things -- that the laptop is far from dead, and customers love cheap laptops running free apps on a free OS.

If Microsoft doesn't decrease its dependence on paid versions of Windows or Office soon, new Chromebooks could cause more losses at its Surface division and convince more Ultrabook partners to defect. A low-end Windows laptop might help Microsoft stem the bleeding, but it could be a costly gamble that cannibalizes its own higher-end laptops, tablets, and hybrids. Meanwhile, Samsung needs to hold its ground against innovative competitors like Acer if it hopes to grow Chromebooks into a significant source of revenue to offset declines in mobile devices.

What do you think, fellow tech investors? Will Chromebooks turn the PC market upside down, or will they eventually lose momentum and fade away like netbooks after three years of popularity?

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Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of 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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