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Executive summary:

  • Google hasn't designed an Android OS for desktop and laptop PCs.
  • The traditional PC market could be disrupted if Google acts quickly enough on it.
  • Lenovo reveals a PC running Android.
  • Windows 9 will make apps compatible across all web capable devices using the same OS.
  • The operating system may become the key differentiator for all web capable devices in the near future.
  • Google may be able to drive $448 million in added revenue from releasing Android to PC.
  • Microsoft's OS business may reach an inflection point by 2016.

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So the other day I was hanging out at Starbucks Coffee working on an article, and then out of nowhere a man sat next to me and opened up a Laptop running Android 4.4 KitKat. So, I looked over at him, and asked him, "is the PC even stable?" Man replies, "Yeah it looks stable." I ask, "How did you get your hands on an Android laptop?" The guy scribbles on a piece of paper, Android-X86.org.

3rd party developers have come up with a way to port the Android operating system to the PC, and it seems they've been able to do this successfully, for quite a while. This is something that bothers me, because if the option of an Android based PC was available this whole time, why didn't Google (NASDAQ:GOOG) push itself down this path sooner?

At the present moment, Google supports Chrome OS for PC, which is an OS that comes with web applications that run on HTML5. With limited developer support and lack of cross-compatibility with Android, the OS hasn't gained a whole lot of momentum.

Lenovo goes down the path with or without Google

By now everyone and their mom knows that the tower/laptop PC is a declining business. At the same time, the traditional PC could be a market that Google could take advantage of. Google needs to develop an OS that would put emerging market PC OEMs like Lenovo (OTCPK:LNVGY) in a stronger position. Lenovo has made strides in the space by showcasing PCs that run on Android at CES 2014.

By cutting out Windows licensing costs, Lenovo should be able to increase its install base of entry-level consumers. After all, every bit saved on the cost of production is added savings that can be passed on to the customer. While it's true that ARM based chips are more than sufficient to run Android, getting the horsepower from higher power components from AMD and Intel (NASDAQ:INTC) could fulfill a gaping hole in Google's long-term strategy of being an alternative PC platform to Windows and Mac/iOS.

I'm sure Google is aware of what Lenovo is doing, but I haven't seen Google do something to aid Lenovo in its efforts. Google could design a version of its Android OS that would be crisper for the PC. It could run the same exact applications from the mobile and tablet version of Android, but it could have a design that takes advantage of keyboard and mouse inputs. The way you'd design an OS that's aesthetically pleasing to PC users is up for debate. Despite this fact, Google is the expert on designing its own operating system, and I see no point in Google sitting back on its hands while Lenovo figures out a way to port Android over to PC.

Will Microsoft make Windows 9 free?

Google hasn't had much success with Chrome OS. However, if Lenovo is able to successfully demonstrate that Android is a viable OS for PC, Google may abandon the Chrome OS, and focus more of its attention on making Android compete directly with Windows.

Microsoft (NASDAQ:MSFT) may have no choice but to make its operating system free for consumers as a result, and hope to recoup the lost revenue with royalties on applications that are sold through the Windows application store. Some have outright speculated that Windows 9 will be completely free, and that the upcoming operating system will make applications compatible across ARM and X86. This means that a game that I buy for my Xbox One in theory could also transition over to my PC. Likewise, a mobile app that I buy could also be accessed via my PC. This is advantageous to application developers, because they would only need to design a single application to tap into all the devices running on Windows 9. What an ambitious project. I really hope Google is up to something similar.

With Microsoft working day and night to get project threshold underway, we're seeing the OEMs carry the Android operating system over to desktop and laptop with or without Google's support. There may be developers that are interested in developing more powerful applications for Android, but because Google's primary focus is on mobile, Google could miss out on capturing the higher-tier PC users.

So going forward, I think the writing is on the wall. Perhaps the biggest differentiator for the internet of things will be the operating system, and the option of running more powerful applications on different devices, while carrying over the cross compatibility. At the present moment, none of the major three tech giants offer a truly comprehensive ecosystem.

Financial impact to Google and Microsoft

In the end, Microsoft would lose revenue from consumers if they continue down their current trajectory, so to salvage its market position, it may eventually offer the Windows OS for free. In that case scenario, Microsoft's revenues from selling operating systems will drop significantly. The silver lining is that Microsoft will be able to offset this negative impact by selling mobile devices (Nokia) and cloud services (Windows Azure). I also believe that Office 365 will be sufficient to carry the organization's revenue growth.

Google, on the other hand, will prosper from Lenovo's use of Android as an alternative operating system. Using Android is extremely practical for winning lower tier consumers in the emerging markets. Google's income from royalties probably won't move by much from Lenovo. But if Google were to design a dedicated Android operating system for PC, Google may be able to drive a more meaningful improvement to bottom line.

I'm going to estimate the potential sales that Google could generate from launching Android for PC.

(click to enlarge)Source: Google

As you can tell, Android revenues primarily fall under the "other" category of the financial statement. The 3-year growth rate has been 53.53%. I'm fairly certain that the other segments that fall under other revenues have fairly low contribution to sales, so I'm going to use the other revenues figure to find the average amount of revenue that Google generates from Android.

(click to enlarge)

Source: Gartner

So we don't really have that many reputable forecasts, or quantitative data on present to future install base. And if such data existed, I'm sure it would be really expensive to access. Therefore, I'm going to use shipment projection instead.

I'm going to create a run-rate projection for future revenues from Google Mobile. Then use that figure to find the projected average revenue per user figure. With this method, I was able to calculate that Google will generate $11.72 billion from Android off of 1.25 billion device shipments. The revenue per shipped device increases to $9.34.

(click to enlarge)
Note: Device shipments came from Gartner for 2011-2015, however, other revenue projection is based on its long-term growth rate.

With the average revenue per shipped device figure for 2015, I have been able to identify the value of each additional Android user. This will come handy when identifying the future revenue potential from PCs.

(click to enlarge)

Source: Statista

I estimate that Google will be able to reach 10-15% market share with a Android operating system for PC. This would be a reasonable market share figure for Google as Apple (NASDAQ:AAPL) has 13.7% market share, and grew its shipment figure by 28.5% year-over-year, according to Gartner. However, the difference between Apple and Google is that Apple has much higher ASPs for its PCs, so it's likely that Google could capture a larger percentage of the PC market than Apple. Plus, Google will go through the distribution of established OEMs like Lenovo. Therefore, I believe that a 10-15% market share for Android is an extremely conservative figure for desktop and laptop PCs.

2015 PC shipment figure for laptop and desktop PCs is estimated to be about 320 million. At 15% market share, and average revenue per Android license at $9.34, I estimate that Google will generate an additional $448 million from 48 million Android PCs.

Whether Microsoft ends Windows license sales all at once or gradually lowers the price of Windows 9 is unknown at the present moment. In this specific case, a quartic function best identifies a inflection point in Microsoft's OS licensing business.

(click to enlarge)

Note: Data from 2009-2013 based on annual report figures of Microsoft's Windows division. Approximately 65% of sales is attributable to OS licenses sold to OEMs, according to Microsoft.

Using the quartic function F(X) = -57.53(x)⁴ +992.6(x)³+5,843(x)²+13,815(x)+1,393.25 we were able to forecast up to 2016. The input x is years since 2008. The output figure is in millions of dollars.

The exact impact of Windows 9 isn't completely certain, but with a mathematical correlation coefficient of .99, the function indicates that Microsoft should be able to sustain license growth until 2015. But following 2015 it's indicated that Microsoft's sales from OS licenses will decline abruptly. Whether this happens as a result of price cutting or offering Windows licenses for free is up to your imagination.

Conclusion

At the present moment, Google hasn't released Android for PC. But based on my analysis, I believe that Google could ship up to 50 million Android PCs at some point in the future. Sure 50 million PCs don't add a whole lot to the bottom line of Google in the immediate timeframe, but it may lower the barrier of entry for designing apps for Android.

Also, the financial impact from releasing Windows 9 is uncertain. But if rumors are true, it would be wise to anticipate some sort of inflection point in one of Microsoft's more traditional businesses. By calculating a line of best fit using a quartic function, Microsoft's operating system business will report declining sales by 2016. Granted, this is a prediction, so things may not actually turn out this way.

Source: Google Ignores The PC While Lenovo Pushes Forward