Google Will Eat Microsoft's Lunch

| About: Microsoft Corporation (MSFT)

In several articles (here, here, here, and here) we have been pondering the future of Intel (NASDAQ:INTC) and Microsoft's (NASDAQ:MSFT) Windows, both companies have seen their core market, personal computers, coming under threat from mobile and hybrid devices working with processors based on the design of ARM (NASDAQ:ARMH) and operating systems from Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).

We have described how Intel and Microsoft are fighting back to get more traction in these new mobile and hybrid markets, but we weren't too optimistic. There is considerable momentum behind iOC and Android, and some network effects, complicating the life of Microsoft. CPU's based on ARM designs are, at least up to now, cheaper and more energy efficient than those of Intel.

What we haven't mentioned yet is that Android is also invading into the territory of the PC and laptop. Well, we did marvel at the upcoming Asus Transformer (the hybrid that defined the category of hybrids, that is, an ARM/Android based tablet, but it has a base with more connections, a second battery, and a keyboard, clicking them together delivers a laptop, sort off), but there is more going on here.

On a smartphone and a tablet, the ARM/Android combination provides a useful "computing" experience for most users. One can surf the web, watch videos, communicate, and there are a growing, and already bewildering amount of applications (apps) that can do all sorts of things.

The first thing to note is that for an increasing amount of people, this is their first and/or most important computing experience, and that experience is making people less hungry for buying laptops and desktops, as the declining sales testify.

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It's also very important to keep in mind that many people use these devices frequently, that is, they're becoming intimately familiar with the workings of the software and it might not be all that easy to transfer all their data to another computer environment. That is, the more they use the Android platform, the higher the switching cost will become.

One of the aces up the sleeve of Windows is that it is the dominant computing platform, breeding exactly this kind of familiarity and non-seamless data transfer, that is, switching cost. This dominant position could not be breached by taking on Windows on its own turf, as Apple tried, even with (according to many) a superior operating system.

However, Android has taken the mobile and (to a lesser extent) tablet world by storm, creating the same kind of switching cost on these platforms. With its position more or less cemented, can it now embark on taking the PC world as well? In other words, does an Android PC make sense?

At first sight, the answer has to be a rather resounding "no." Google isn't promoting Android as a PC operating system, they are promoting Google Chrome as a PC operating system. If even Google doesn't believe in Android as a PC operating system, the whole notion should be discarded, right?

Well, not so fast. Android PC's of sorts already exist. Entrepreneurial people have put Android on USB stick-like devices, little boxes, or even keyboards and are selling them for around $100 as more or less full functioning PCs. Perhaps the most familiar of these are the USB drive type sticks with versions of ARM/Android on them, the MK802 produced by Rikomagic from China.

Now in its sixth iteration, you just stick it into a monitor (or TV) and you have an Android PC. The latest one, the MK802 IV, runs on a quad-core ARM CPU (Cortex-A9 at 1.6GHz), a Mali GPU and 2GB of RAM, 8GB of flash and Android 4.2. That's still not cutting edge, we're waiting for ones with Qualcomm's (NASDAQ:QCOM) Snapdragon 800 CPU, or NVIDIA's (NASDAQ:NVDA) Tegra 4 chip (CPU and GPU in one).

Basically these USB stick like devices are like your smartphone, minus the screen. We have already set out in earlier articles that we sort of see the mobile phone developing into your computer. Instead of buying an USB stick-like device, you could just use your phone, plug it into a bigger screen and hook up a keyboard and mouse.

But there are other form factors. Take for instance the CoolShip. It looks like a full-size keyboard, and that is because it is. But it's also an Android PC, with upgradeable hardware. Or take the $99 MiiPC from ZeroDesktop. It has been funded by Kickstarter to the tune of $175,000 and runs on Android 4.2.

It has unique parental control features (parents can see on their Android smartphone what their kids are doing on the MiiPC and lock them out of certain applications or set time limits). It has been delayed by a couple of months because of some parts shortage, but that gives you the opportunity to see how it looks.

Remember, this thing is supposed to be sold for $99. That's a price at which quite a few people might be willing to give it a try, perhaps as a computer for their children, or because they're already familiar with Android. It is a price that no Wintel PC can match.

That point needs to be stressed. Price/feature wise, Android PCs win hands down. Many people have been marveling at the new Sony (NYSE:SNE) VAIO Pro 11 and 13, or the new MacBook Air's which bring all-day computing. Wonderful, stuff indeed, until you meet the new Asus Transformer, armed with the new (ARM based) Tegra 4 processor.

It has a detachable 10 inch IPS screen with a 2560x1600(!) resolution, way sharper than the Apple (144x900) Sony Pro 11 (1920x1080). It's also smaller still, and has twice the battery life of the Sony. (7 versus 14-6 hours) and doubles as a tablet with its detachable screen.

It's even capable of 4K output (although the Haswell powered Air and Pro can do that as well). But the point is, the Transformer still beats the Sony and Apple in form factor, battery life, screen, and a device able to run 4K. It has a USB 3.0 port, Bluetooth 3.0, HDMI and an SD slot.

Price/feature wise it beats PCs hands down. The big question becomes, is Android capable enough to function as a PC operating system?

What does it do?

Well, basically the same as your Android powered smartphone or tablet. We understand that for some, like many in business, this simply won't do, as many will need to use legacy Windows software (although data interoperability can do wonders and tablets have advantages in business as well). But for the consuming masses, Android is already close to offering a fully fledged PC at much lower cost.

It's so cheap because a free operating system is paired with an inexpensive processor, and that is, at least for now, difficult to match for the Wintel world. However, there are still some teething problems, here is digital trends trying out two little Android USB sticks (or rather, HDMI sticks) and the Raspberri Pi. The latter comes off really poorly compared to the Android PCs, which is already quite telling.

The most expensive Android ($63!) runs Android 4.1, not the latest version (4.2). The start is promising:

Both Android mini PCs booted directly to the homescreen within a minute and worked without any fiddling. After connecting to Wi-Fi we were immediately able to browse the Web and download apps. The devices detected our USB wireless keyboard instantly and the 4.1 model, which has Bluetooth, worked well with a compatible keyboard.

The cheaper version runs Android 4.0, and that one had numerous problems, the 4.1 version much less so:

Android 4.1 is the first version to incorporate "Project Butter," Google's successful attempt to optimize the operating system's performance. We had no problem viewing complex Web pages, and 1080p streaming video was smooth. In some ways, the performance of this mini PC matched Windows desktops sold for hundreds more.

But it's very much a work in progress. It's clear they are designed with a small screen in mind. For instance, the media player's control buttons were "comically large" and this problem reappears in other applications. The conclusion from digitaltrends was that mini PCs aren't ready for primetime, but they are close:

We were also surprised by the power of the 4.1 mini PC. Yes, the hardware is technically slower than anything in a modern Windows desktop, but it didn't feel that way. Instead, the interface was snappy, Web browsing was smooth, and load times were short.

And despite some of the handicaps, there are already lots of uses it's perfectly able to execute

Keep in mind this is a $63 computer with last generation hardware and software. We think it's a fair bet that someone figures out how to iron out the teething problems for using it as a PC. Some, like Avram Piltch from laptop magazine are already quite confident:

Android is ready to take on Windows as the desktop OS of choice. With its extensive ecosystem of apps, its highly customizable interface and multitasking prowess, Google's open-source operating system provides a better PC user experience than Windows 8′s Modern UI.... Android apps have deep access to many functions of the OS, but Windows 8 "Modern" apps have more limitations, particularly when they're running in the background.

And newer generations with Jelly Bean (Android 4.2) like the quad core mini PC are already appearing (also able to run Linux by the way). You might also be surprised that big PC manufacturers are jumping onboard, here is Dell's (NASDAQ:DELL) project Ophelia, a stick based PC running Android like the ones discussed above, but with a twist:

Dell's market angle for project Ophelia is as an inexpensive alternative to Tablets and PC: They argue that your HD or HDTV will perfectly serve as a simple Internet Workstation, while also infusing it with extended multimedia and gaming capabilities due to the Dell's Ophelia Android 4.1.2 preinstalled inside it. On the other side - Dell is also talking about giving Ophelia an enterprise twist, marketing it as a pocket sized client, including tools like their DELL WYSE Cloud Client Manager.

Rather hilarious is that the article complains that the supposed $100 price tag is expensive. But for a lot more ($400) you get a full-blown all in one PC with a 21.5 inch screen running Android, the Acer (OTC:ACEIY) AIO. It runs Android 4.0 though, a bit of a letdown (although indicative of what's possible even with older generations Android). Even Intel is working on a $200 laptop running Android.

But for us, by far the best example is the upcoming Asus Transformer, the little Tegra 4 powered hybrid with the 2580x1600 screen and capable of handling 4K, USB 3.0, all-day battery, etc. We ask the reader, what daily computer chore is this device not able to handle?


The more advanced devices running Android already offer a host of PC-like performance that, despite some teething problems, will be good enough to fulfill most computing needs for many people at a fraction of the cost of normal PCs. These devices aren't widely know yet, but the familiarity with Android through smartphones and tablets will have lowered the adoption barriers significantly when it becomes more widely known.

While Microsoft is embarking on getting a slice of the buoyant mobile and tablet market, its home turf, the PC market is coming under a stealth attack. It is not about to be run over, as many business customers especially are dependent on legacy Windows applications. But it's market and margins can be considerably dented, it's quite difficult to compete with something that's free, good enough for many, and requires significantly less sophisticated hardware to be able to run smoothly, enhancing the cost advantage of the platform.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.