Demand for Chromebooks -- inexpensive laptops powered by Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Chrome OS -- appears to be on the rise. Educational institutions, in particular, have begun to adopt Chromebooks at a rapid rate, while a growing number of PC vendors offer a wide selection of Chromebooks at aggressive prices.
But Microsoft (NASDAQ:MSFT) isn't giving up without a fight. This holiday season, shoppers looking for an inexpensive laptop will have a variety of Windows-powered devices to choose from, including the $199 HP Stream.
Microsoft's fear of Chrome OS -- irrational or justified?
Microsoft's campaign against Google's Chrome OS has caught some technology pundits off guard. Despite the growing popularity of Chromebooks, Google's share of the traditional PC operating system market remains well in the single-digits -- according to IDC, only 1% of the PCs shipped last year were powered by Google's Chrome OS.
Yet, the growth of Chrome OS is clearly concerning to Microsoft: Its forthcoming holiday push is not a one-off event, but the continuation of an ongoing, active campaign. Late in 2013, Microsoft rolled out the first ad targeting Google's operating system; several more have followed, and Microsoft announced in April that it was working to reduce the price of Windows-powered PCs by dropping some of the licensing fees it charges PC OEMs.
An ad campaign and pricing shakeup may seem like overly aggressive responses to what's ultimately a niche product. Yet, it seems justified in the context of what Chromebooks could do to Microsoft's business.
Historically, Windows and Office have composed the bulk of Microsoft's revenue, and have generated almost all of its profits. The widespread adoption of Google's Chrome OS could have a devastating affect on Microsoft's core business.
As an alternative to Windows laptops, each Chromebook sold represents a lost Windows licensing sale. Moreover, Microsoft's traditional Office suite will not currently work on Chrome OS -- Chromebook users must choose Microsoft's free online alternative or use Google's built-in competitor, Google Apps (seemingly the more likely choice).
Can Chromebooks go mainstream?
The lack of Microsoft Office may make Chromebooks an anathema to some business users, while their reliance on the web limits their appeal to many consumers.
Google's Chrome OS has many limitations, and Microsoft has aggressively emphasized them in its anti-Chromebooks ads. That message doesn't seem likely to change, as a slide from a presentation Microsoft gave at its partner conference highlights the advantages traditional Windows PCs have over Chromebooks. Many of them are quite significant, including, most notably, the ability to run traditional desktop apps.
It's reasonable to expect the appeal of Google's Chrome OS to increase over time, as software shifts to the cloud and high-speed Internet connections become better and more widespread. Nearly all of Microsoft's hardware partners have jumped on the Chromebook bandwagon, and research firm Gartner expects Chromebooks to triple in popularity over the next five years.
That may prove to be an underestimation, as Google has been working to bolster Chrome OS. Soon, Chromebooks will be able to run some Android apps, and deeper integration between Android-powered mobile devices and Chrome OS-powered PCs appears likely.
Cheaper PCs may not be enough
Ultimately, competing on price may deter some consumers from leaving Microsoft's Windows ecosystem, but it doesn't address the fundamental appeal of Chromebooks.
Yes, Chromebooks are inexpensive, but they are also a good value -- with increasingly fast processors and solid state drives, a $199 Chromebook can offer an experience far greater than a comparably priced Windows machine. They're certainly limited in their capabilities, but they're largely impervious to traditional malware, and can be easier to manage from an IT perspective.
For now, Google's Chrome OS remains a niche offering. Microsoft should hope it stays that way.
Sam Mattera 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.