Google Chrome OS--Much Ado About Nothing

This week,  Google (GOOG) announced the launch of a new operating system, the Google Chrome OS. The Chrome OS is expected to launch in the second half of 2010 and is initially targeted at providing a gateway to the Web on low-end netbook computers. Despite Google's army of engineers and a well-known brand, we think the Chrome OS will face a number of challenges in gaining significant market share. First, similar Web-focused operating systems already exist and are included on some computers sold by vendors like  HP (HPQ) and  Dell . Second, the basic premise of the Chrome OS is that technology and users are ready for a world where all applications reside on the Web and are accessed via a browser. We question the soundness of this view--we expect that a majority of consumers continue to prefer some locally hosted applications that can provide better speed, security, and reliability and do not require continuous Internet connectivity.

In addition, we would also point out that Google has launched dozens of disparate products (Google Answers, Print ads, TV ads, Radio ads, Google Checkout, Android, Chrome browser) over the last few years, but none of its products outside of search have ever gained much traction. While the Chrome OS could be successful, given Google's limited success outside of the realm of search thus far, we think it's unlikely.

However, the success or failure of the Chrome OS by itself may not be that important to Google. Assuming Google realizes that search is their money maker, then perhaps Google's end goal is to lower the barriers to consumers doing more searches (More people online = more people searching = more profits for Google). The Chrome browser, Chrome OS, and Android are all designed to optimize the online experience. In response, Google's competitors are being forced to design new products that also focus on the online experience. Therefore, even if Google's products never gain traction, they only fail because their competitors are making better products that could potentially lead to more online activity, and more searches on Google's Web site. So Google still wins! Any uptake in Google's new products would be frosting on the cake.

From  Microsoft's (MSFT) perspective, we think the significance of Google's announcement isn't about a looming battle between Microsoft and Google in operating systems--rather that Google will be providing another driving force behind the adoption of cloud computing with the Chrome OS. The combination of Web applications and cheap computing devices (netbooks) has been chipping away at consumers' allegiance to the Windows platform (see our Stock Strategist article "Netbooks: A Race to the Bottom?"). PC makers such as HP and Dell have already attempted to address this shift by providing instant-on browser experiences wherein users boot into a lightweight Linux OS that provides only a Web browser to accomplish common tasks such as checking email and browsing the Internet. Google's Chrome OS (which is essentially a lightweight Linux OS plus Google's Chrome Web browser) is yet another attempt at providing just enough of an operating system to use Web applications. The Chrome OS is not revolutionary, but Google's brand and distribution could add some momentum to the ongoing adoption of low-cost Web-based computing.

It remains to be seen how big a splash the Chrome OS will make when it launches next year, but if the present is any indication, Google may find it very challenging to drive adoption of the operating system. Other Linux-based operating systems already exist for netbooks, but Microsoft's Windows XP remains the dominant platform, even though users have to pay an extra $25-$30 for it. While a Web-applications-only world seems much closer than it was during the Netscape/Java--Microsoft battle in the late 1990s, most consumers are not yet willing to give up the flexibility of running desktop applications in order to save a few dollars. The situation could be different for the lower end of the market (such as portions of the population in developing countries) where price-sensitive consumers have to choose between having a computer with Web access only versus not having a computer at all. Rather than displace Windows on desktops and netbooks, efforts like Google's Chrome OS are most likely to find initial traction in this market segment, or in new categories of dedicated Web tablet-type computing devices, thereby growing the market for computing.

It also bears mentioning that while cloud computing is disruptive to Microsoft's Windows business, the firm has long been aware of the trend and has been preparing for it. The company is expected to unveil pricing for its new Azure cloud platform later this month, and it could be well-positioned to capture economic value from enterprise adoption of Web-based applications. Google and Microsoft are among the very few players with the financial resources to build out the infrastructure necessary to be competitive in this new realm of computing. In the battle for enterprise customers, Microsoft's existing developer base, combined with low barriers to Azure adoption, tip the scales in its favor, in our opinion.