Microsoft (NASDAQ:MSFT) will cut Windows licensing fees on PCs that retail for less than $250, according to Bloomberg. The move appears to be in response to the growing popularity of Google's (NASDAQ:GOOGL) Chrome OS, which has received the support of nearly all of Microsoft's hardware partners, including Hewlett-Packard (NYSE:HPQ).
Microsoft's aggressiveness is justified
Cutting Windows licensing fees is just the latest step in Microsoft's ongoing war against Google's operating system: In recent months, Microsoft has run multiple ad campaigns slamming Google's Chromebooks, urging consumers to stay away.
Microsoft's aggressive assault on Google's operating system has taken some by surprise -- despite rapid growth, Google's share of the traditional PC market is paltry, while Microsoft's Windows remains dominant. Last year, just 2.5 million laptops powered by Google's operating system were shipped worldwide, according to IDC -- about 1% of global PC sales.
But Microsoft's fear of Chrome OS is more than justified. Google's critics frequently cite the web-dependent operating system's many limitations -- without the ability to run local software, Chromebooks are unlikely to ever capture the lion's share of the PC market, at least not anytime soon.
But a single Chromebook sale is still one sale too many for Microsoft, as Chromebooks threaten virtually every part of Microsoft business. Unlike mobile devices, which might be thought of as supplementary, Chromebooks are substitute goods -- every Chromebook sold is a Windows sale that didn't happen.
The damage doesn't stop there. Owners of Chromebooks can't use Microsoft's full Office suite (unless they stream it from a Windows PC), resulting in even more lost revenue for Microsoft. Instead, they must rely on Google's competing Docs, along with Google's other web services. Given their deep integration, Chrome OS users are unlikely to use Microsoft's competing products -- I doubt many Chromebook owners search with Bing or use Outlook.com for their email.
Microsoft's hardware partners are switching sides
At the same time, while Google's share of the PC market may be small right now, it could continue to grow in the coming quarters. As I've written before, all of Microsoft's biggest hardware partners have jumped on the Chromebook bandwagon, and their support and marketing could drive further Chromebook adoption.
Hewlett-Packard in particular has been very supportive of Google's operating system, releasing three different Chromebook models last year, and more recently, a higher-end Chromebox aimed at enterprise users.
For about a year, Hewlett-Packard's CEO Meg Whitman has consistently referred to her company's "multi-OS" strategy. But while she may call it "multi," what she really means is that Hewlett-Packard is slowly moving away from its dependence on Microsoft's Windows, offering Google's operating systems (Chrome OS and Android) as an alternative.
It's easy to see why Hewlett-Packard would favor Google's operating systems: Google gives them away for free, resulting in higher margins for hardware manufacturers, and unlike Microsoft, Google doesn't compete when it comes to hardware. Last year, Whitman identified Microsoft as a "competitor," as Microsoft's Surface Pro competes with Hewlett-Packard's own Windows PCs.
Cutting Windows licensing fees could go a long way in winning back hardware partners like Hewlett-Packard. Having to pay Microsoft less on every PC would allow Hewlett-Packard to grow its margins, or to lower the price of its already low-cost PCs and compete for more market share. As most Chromebooks retail for around $250 or less, Hewlett-Packard may be less likely to promote Google's operating system.
Stamping out Chrome OS won't be easy
Most of Microsoft's failures over the last decade have been the result of inaction -- its inability to recognize what the iPhone and iPad represented, or to capitalize on search and social media early in their development. In that regard, Microsoft's willingness to aggressively target Google's Chrome OS before it's emerged as a truly viable threat is an encouraging sign.
Still, I don't think cutting Windows licensing fees on low-cost PCs will be enough to completely wipe out Chrome OS. A big part of Chromebooks appeal is their low cost, but it's more than that: If you can get over their many limitations, Chromebooks offer a better user experience than traditional Windows PCs, impervious to software degradation and traditional malware.
Ultimately, if it does succeed in wiping out Google's operating system, it may prove to be a pyrrhic victory. Microsoft, unlike Google, sells its operating system. If it has to almost give it away to stop Google, the Windows business becomes almost pointless.