There's been a lot of buzz surrounding machines that come running Google's (GOOG) minimalist "Chrome OS" called "Chromebooks". These are $200 - $250 machines that can run the Google Chrome web-browser. The hardware isn't all that powerful, but the idea is that most people just don't need all that much processing power, memory, or storage space. Users trade flexibility and power for something that's simple, functional, and cheap. Does this new paradigm pose a significant threat to Microsoft's (MSFT) mainstream operating systems?
The Operating System Landscape
While it seems to be in vogue to proclaim that people have "moved on" from Windows (especially as Apple's (AAPL) Mac line gains popularity), a little hard data can be quite sobering. According to Net Applications' market share data, Microsoft's operating systems still dominate the desktop/notebook landscape:
We see that Windows 7 is the most popular OS with the aging Windows XP close behind. Even Microsoft's infamous Vista is more popular than the entirety of the "other" category combined. So as it stands today, Microsoft's dominant position in PC operating systems seems very much intact.
But how about the future?
People Do More Than Surf The Web
There is a popular conception that the majority of people just use PCs to surf the web or write Word documents. The notion that a combination of powerful software and powerful hardware just isn't necessary is prevalent. I believe that this view is overdone and that users actually do enjoy having higher quality, faster, and more feature-filled systems. What are some of these use cases that demand more than a bottom-end Intel (INTC) Celeron or ARM (ARMH) Cortex A15?
Gaming: The PC gaming market is actually growing. Graphics chip makers Nvidia (NVDA) and Advanced Micro Devices (AMD) continue to push faster and faster graphics cards for gamers. Nvidia hit a record number of design wins for the "Ivy Bridge" generation of notebooks and recently had its best quarter ever, fueled in no small part by strong GPU sales. Games are getting more and more realistic, and powerful hardware is needed to drive further advances there.
Photo/Video Editing: As computers become more powerful, things such as video and photo editing, especially from hobbyists, are exploding in popularity. This requires powerful software (that isn't going to be run from a browser) as well as powerful hardware. It stands to reason as the content consumption devices (tablets, phones, and even PCs) become more powerful, the content itself will require more power to generate. Can a Chromebook really satisfy a digital artist or a hobbyist filmmaker?
Music: Professional and amateur musicians alike need powerful hardware and software to produce their works of art. Just as with videos and photos, more folks are using their PCs to do complex things with music. Such work generally favors high end sound cards, fast processors, tons of RAM, and specialized software. Can a $199 Chromebook with 2GB of RAM really work here?
There are many other applications that require powerful processors and specialized software that just isn't available through a web browser on a low end Chrome OS-powered machine. Since Chrome OS doesn't really try to push itself as a "full" OS meant for higher end hardware, it doesn't seem likely that people who use their PCs as their workhorses will be so apt to switch to a limited platform with comparatively weak hardware.
"Real" PCs Are Really Cheap Anyway
Another thing to consider is that "real" PCs with Microsoft's Windows 7 or 8 and faster Intel or AMD processors span the entire spectrum, from $300 laptops to $2,000+ machines. On Newegg, one can pick up an 11.6" Core i3 powered laptop with 4GB of RAM, a 500GB hard disk drive, and full compatibility with all Windows applications for $449. For $100 more, a shopper can get similar internals as well as a touch-screen. If the user is willing to go with a larger 15.6" laptop, (s)he can get something with even more power for even less money.
On one hand, this is about twice the price of the highest end Chromebook, but over a period of 2-4 years, it seems that the benefits of better hardware and significantly stronger software compatibility likely far outweigh a $200 - $300 premium for most users. People like cheap, but they like value more. This brings me to my next point.
Mac Popularity Proves That People Prefer Quality
Another interesting trend to observe is that Apple continues to gain share in the traditional notebook PC space. Keep in mind that Apple plays in the very high end space; you're not going to buy a Mac of any kind at a price under $1,000. Yet despite the premium price point, people are willing to cough up extra for a better product. I believe that this can be attributed to a number of factors:
PCs Last A Long Time: Unlike a phone which can be replaced cheaply every year or two, thanks to contracts, a PC is something that is generally expected to last a long time (3-5 years is pretty typical). Not only does the machine have to perform well for a long time, but it also needs to be built well enough to "hold up" to typical usage scenarios.
Performance Matters: While most smartphone and tablet applications are fairly lightweight, many PC-oriented applications (such as those listed above) really do benefit from better performance. Further, people are more likely to aggressively multi-task on a PC than on a tablet or smartphone, so people are more likely to notice the limitations of a cheaper, slower machine.
People Like "Nice" Things: A more qualitative metric, but people simply seem okay with paying extra for something that looks and feels "well made". This is a big reason that has helped the MacBook sell so well compared to the hordes of cheap, plastic, bulky PCs.
The Chromebook is actually nicely designed for its price point, but it's hard to see this device as a full-fledged PC replacement. That being said, it's a great device for what it is.
Chromebooks Are Selling Out And Reviewing Well
One thing that cannot be ignored is that the Chromebooks actually sell quite well. A quick look at Amazon's list of top-selling notebooks shows that the Samsung Chromebook holds the top spot as of writing. Obviously this thing is selling like crazy. And why wouldn't it? For its purpose and at its price point, it's a bargain. But what exactly is its purpose?
According to review site Engadget,
So who's this for? For starters, we've always felt that Chromebooks could be useful in computer labs and one-to-one laptop programs in schools, but now they're priced aggressively enough that mainstream consumers might want them, too. We're thinking travelers who need a lightweight machine for the road, or parents who cringe at the idea of spending $600 on a laptop for their kids. And these were always the target customers, really, except now they're unlikely to find a tablet or equally nice netbook for the same amount of money. In that regard, a price cut goes a long way.
It doesn't seem to me like a replacement for the traditional Windows PC or a Mac. Instead, it seems more likely to "win" the low end netbook space that all of the major PC vendors seem to have decided to stop making.
So, should Microsoft investors worry that these alternate OS devices will eat significantly into Windows sales? Not particularly. The problem Microsoft faces is one of growth in the consumer space as it tries to expand into smartphones and tablets. In the enterprise IT world, a "Chromebook" is probably not going to work, and in the consumer space, Windows Phone 8 and Windows 8 make a great tag-team play on the tablet/smartphone spaces.
In addition, see all of those Windows XP users in the chart earlier in the article? All of those folks will need to upgrade to either 7 or 8 at some point, implying a very nicely pent up demand for "Windows" products.
Microsoft isn't a huge growth story, but I believe with the solid ~3.5% dividend, nice balance sheet, and solid products, the company will be just fine. If you want a "raise your rate CD" but in stock form, Microsoft is your investment.
Additional disclosure: I am short ARMH