Microsoft Vs. Google: The Future Of Windows

| About: Microsoft Corporation (MSFT)

Of all the big tech companies, Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) are the most direct competitors. They compete on a vast array of software products and services, from operating systems, browsers and office applications to online portals, search engines and maps. While the number of competing products is quite large, each company has specific areas where it makes most of its profits. Google makes almost all of its revenue from advertising, with about 70% of it coming from Google websites, most of it from search results. Microsoft has a wider spread of revenue across various divisions. Their business division (primarily Office) earns over 30% of revenue and over half of the company profits, while the Windows division earns a quarter of the revenue and over 30% of profits. It earns significant revenue from its Server and Entertainment divisions. The main question for the long-term investor is how well each company will be able to protect or grow the core businesses and to what extent they will be able to expand into other areas. This article will discuss operating systems, and whether Windows will be able to maintain its current dominance.

Microsoft is the PC-era company with dominant businesses that have a locked-in user base. People are used to using Windows, so they are unlikely to switch to an alternative for minor reasons or small cost savings. In addition, Microsoft has very strong partnerships, so it often has a hold on the market even if individual consumers might have otherwise not chosen it. For example, it is normally cheaper to just buy a laptop with Windows than one with just Linux, so Microsoft has a locked-in source of revenue for every laptop purchase.

However, Microsoft faces many challenges ahead as new devices such as smartphone and tablets become extremely popular. Microsoft has not developed a strong foothold in the smartphone and tablet market, and while it will probably gain a larger share (with devices like the Nokia Lumia), it seems unlikely to ever get near the dominance it held in the PC market.

The question then becomes - will the diversity in the smartphone and tablet market threaten Windows' dominance of the PC market? It seems unlikely that people will replace their laptops entirely with smartphones or tablets. While laptops have partially replaced desktops, they are able to perform everything that a desktop can. Smartphones and small tablets do not let people type or create content easily; they are better for communicating or consuming content. Since most people need to type, they will probably not get rid of large keyboard-devices anytime soon. Tablets are currently purchased by people who already own smartphones and laptops, but if people have to just choose one device besides their smartphone, they will go with the more functional laptop. However, if large tablets with attachable keyboards grow in popularity, the market may then be up for grabs between Microsoft, Google and Apple.

The rise of smartphones can pose a more indirect threat to Windows' dominance: once people are used to using alternative operating systems (OS) on their mobile devices, they may become more open to using them on their laptops. There are other threats too. It is much easier for users to switch OS's nowadays than it used to be. Most new application are now created for the web (or they run on any platform, like Java), so the user can run them on any computer regardless of his or her personal OS. In addition, Windows 8 (Microsoft's upcoming OS) makes significant interface changes that many regular users have found difficult to adjust to. If Windows isn't the OS people are used to, they will explore other options.

What alternatives are there that people will consider switching to? The various versions of Linux never have been able to gain a strong base outside of techie users, and that doesn't seem likely to change soon. A bigger threat is Apple. However, its computers have always been more expensive than PCs, so until it decides to lower prices, it probably will not take over the market. However, its market share has been growing and it has the ability to build off its gigantic smartphone and tablet base.

The other potential competitor is Chrome OS. In its current version, it does not seem like much of a threat, since it is just a browser and cannot do much when offline. People may not always have wifi access (or a good connection) on their laptop, and many applications are not yet as powerful on the web. Even an Android device has far more offline capabilities than Chrome OS, though one would expect a laptop to have more capabilities than a phone! This explains why Chrome OS has not yet caught on, but Google may be changing strategy somewhat. It recently modified its OS so it has a more standard desktop and window interface. And it is rumored to be working on full offline capabilities for its apps. As online applications become more powerful, the Chrome OS will be in a position to chip away at Windows' market share. It will try to be a faster OS with fewer security risks and technical difficulties, so people may begin switching over to it. Regular people may begin using it once it can do all the common tasks they use a computer for, even if it doesn't have the same capabilities for things like 3D-graphics editing. In a couple years, Chrome OS could become a real threat to Microsoft Windows.

The possible spread of alternative OS's will not just threaten Microsoft's sales of Windows, but also sales of Office. While Microsoft Office is the most popular office suite on the desktop, it has no presence on Chrome OS, and is not as dominant on the Mac. Even on Windows computers, there is stiff competition between Microsoft's and Google's online web app offerings. Thus, the potential spread of Chrome OS poses a threat to both of Microsoft's biggest divisions, which represent over 90% of Microsoft's profits. While Microsoft's stock has a low P/E ratio and pays a nice dividend, the risk of an alternative operating system succeeding means that it is a risky stock to hold onto long term.

In the next article I will go into more details about the Google-Microsoft competition in Office suites.

Disclosure: I am long GOOG.