Microsoft (NASDAQ:MSFT) spent years letting competitors slowly eat away at its PC business.
The company was slow to respond to the introduction of tablets and that lost it a chunk of business -- perhaps permanently. Microsoft was equally unprepared to compete with Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Chromebooks and the low-priced laptops have cut into its sales at the bottom of the PC market.
Now, Microsoft is fighting back with two sub-$200 Windows laptops released for the holiday season. The most heavily pushed of these machines, Hewlett-Packard's (NYSE:HPQ) Stream 11, costs $199 and in many ways is a Windows copy of a Chromebook.
A thin, somewhat elegant machine, the Stream has the long battery life and limited on-board memory normally associated with Chromebooks. The 11.6" laptop does run the full version of Windows 8.1 and it's not as reliant on the cloud as Google's machines, but it's a device meant to use the cloud.
Much like the way Google's device is meant to work with its suite of productivity apps, the Windows laptop is optimized to work with the online version of the company's Office. To accent that, and sweeten the deal for customers, Microsoft throws in a one-year subscription to Office 365 Personal, a $69.99 value. Add in the fact that Microsoft is offering a $25 Windows store gift card with the purchase, and the price/value offering becomes very aggressive compared to Chromebook. Amazon.com (NASDAQ:AMZN) has 11.6" Chromebooks starting at $179.99, with numerous versions of the device being sold for around $199.99.
How successful are Chromebooks?
Chromebooks have been steadily carving out market share as sales for Windows-based machines have fallen. The Google machines have also essentially created demand for sub-$200 laptops, an area where until recently Microsoft had mostly ignored.
Consumer retail PC sales grew in the United States almost 3% during the 10 week back-to-school period (week of July 4 through Labor Day week) after declining by 2.5% in the previous year, the NPD Group Weekly Tracking Service reported. Chomebooks have been steadily gaining during that crucial sales period, chipping away, along with Apple (NASDAQ:AAPL) at Microsoft's once massive lead.
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In 2014, during the back-to-school period, Chromebook sales were up 32% and accounted for more than 5% of notebook sales, and 18% of all sales of notebooks under $300, according to NPD.Google is nipping away at the low-end of the PC market while Apple is stealing share on the high-end.
The news is not all bad for Microsoft though as the company saw a 37% increase in sales on entry-level Windows laptops priced under $300. Prices for those machines dipped from $271 to $242, the research company reported, which heavily suggests that consumers are drawn by price.
Now that Microsoft has laptops with specs comparable to the various low-end Chromebook offerings, it seems likely that consumers will at least consider them. That could be very bad news for Google and consign Chromebooks to the same irrelevance as netbooks, those cheap, limited laptop alternatives that were big for a little while almost entirely due to price.
Can Microsoft catch up?
Chromebooks have won sales in certain markets -- education specifically -- because of their limitations. The laptops have little in the way of software, have fewer moving parts, and are generally easy to manage and maintain. They also have a very low learning curve for operation, which cannot be said of non-touch laptops running Windows 8.
Still, Chromebooks operate almost entirely in the cloud making them dependent upon an Internet connection. The sub-$200 Windows machines benefit from being connected, but it's not nearly as necessary. Throwing in one year of Office with the HP Stream is also a savvy marketing move. Google's apps have improved, but Word, Excel, PowerPoint, and the rest of Office remain the standards of the business world.
Microsoft also seems committed to the bottom of the market.
"We are going to participate at the low-end. We've got a great value proposition against Chromebooks, we are not ceding the market to anyone," Microsoft COO Kevin Turner sad earlier this year, The Verge reported.
Most Chromebooks, even the cheapest ones, are light, sleek, and elegant, but their prime appeal has always been price. Microsoft is matching or even bettering the price proposition with machines that are more fully computers.
That leaves Google's only advantage being how much people dislike Windows 8. Once that disappears in favor of the much-more-intuitive and non-touch-friendly Windows 10, Chromebooks may as well.
Daniel Kline owns shares of Apple and Microsoft. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, 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.