Google came to master Web search and online advertising largely on its own. But now that it plans to create an operating system to compete with Microsoft's widely used Windows, Google will have to play nicely with computer makers.
Late on July 7, Google said it's developing an operating system for personal computers based on its Web browser Chrome and the open-source coding platform Linux. The software, called Chrome OS, will be specially designed to run applications such as e-mail, word processing, and multimedia through the Internet rather than from a user's hard drive. Google (GOOG), based in Mountain View, Calif., plans to release the product in the second half of 2010.
There's been a lot of guesswork around Google's motives and the timing of its announcement. Many analysts view this as a foray into Microsoft's (MSFT) home turf, or at least an attempt to undercut the software giant's business model, which it may be. But sources close to the situation say Google's main aim is to make personal computers better portals into the Web as it continues to morph from a collection of pages to a place to run a wide range of applications. If PCs can more quickly and smoothly run online software, the thinking goes, the Web will become more attractive as an advertising medium.
And to ensure Chrome OS becomes the platform of choice for a substantial number of computers, Google is going to have to collaborate closely with the computer industry.
There's little cause to believe PC makers want to abandon deeply held ties with Microsoft, which later this year is due to ship Windows 7, an update many analysts say will be a big improvement on the disastrous Vista. Still, computer manufacturers are eager for a viable alternative with a lower price tag. "We really want to understand all the operating system choices other than Microsoft that could be used by competitors or that we might want to use for our own customers' needs," says Hewlett-Packard (HPQ) spokeswoman Marlene Somsak.
HP, as well as Acer, Asustek (2357.TW), and Lenovo (0992.HK), have been in discussions with Google about the development of Chrome OS, Google said in a post to its company blog. A representative from Dell (DELL), one of the few major PC makers not included in Google's announcement, declined to comment on whether it was in talks regarding Chrome OS but says it "constantly assesses new technologies as part of managing our product development process and for consideration in future products." Apple (AAPL) makes its own operating system.
With Chrome OS still early in its development, computer companies may request design choices Microsoft wouldn't dream of adding. "What they want is to gain much more control over the logos, the applications, the way the operating system works, things like that," says Forrester Research (FORR) analyst Frank Gillett, citing a person he declined to identify at one of the top PC makers. "Microsoft understandably didn't want to give in to that at all because they want to create a uniform experience across all different brands of equipment." Google might be more accommodating in this area, since it's more focused on the experiences users will have on the Web. "They'll give more ground there," Gillett says.
Insofar as price matters, Google may have Microsoft beat. Lately, computer manufacturers have balked at Microsoft's plans to charge around $50 for each computer they ship with entry-level versions of Windows 7; that's roughly triple what the software company gets for its cheapest version of Windows now. And as costs for hardware drop, "[the manufacturers] want to be able to aggressively negotiate the best price on all the things that go into their product," says Stephen Baker, an analyst with market researcher NPD Group. "Having another viable operating system alternative coming from a company with great brand recognition would be a huge win for the PC makers."
Google plans to offer Chrome OS free. The company can afford to do that because it would profit from more visitors using its search engine and other online offerings, says Charles King, president of industry analyst Pund-IT.
Bargain Prices on Windows?
Still, Microsoft is getting the price-cut religion. For both Windows 7 and Office 2010, which will be unveiled for the first time at a Microsoft event on July 13, the company will sell discount versions in the hopes of getting customers to buy pricier versions when they run into roadblocks. While Microsoft will continue selling its super-cheap version of Windows now in netbooks, based on the older Windows XP, it will focus on getting customers to buy PCs based on at least the "Starter Edition" of Windows 7—which will have the higher-end "Premium Edition" already loaded on the CD for those that buy the rights to unlock it. As for Office, Microsoft will offer free versions that can be used via a Web browser, but executives are confident the vast majority of customers will want to buy the actual software as well.
What's more, Google has little background in marketing and customer support, factors that could prove critical to the success of a new operating system. Microsoft foots the marketing bill for Windows, running multimillion-dollar campaigns across many forms of media with most new releases. Its recent "Laptop Hunter" TV ads are part of a $300 million campaign launched last year. By contrast, Google's promotions for new products typically take the form of a single blog post. "Google doesn't even know how to spell the word 'marketing,' " says Rob Enderle, technology analyst and president of the Enderle Group.
A lack of marketing and support are some of the reasons that Linux has failed to gain traction with consumers, despite attempts by PC makers over the past year to bundle forms of the open-source operating system with netbooks, the low-cost, stripped-down laptops that are used mainly for surfing the Web. This year, researcher IDC predicts the portion of netbooks that ship with Linux operating systems will fall to 4.5%, from 24.5% last year. Google says Chrome OS would initially be aimed at netbooks.
Microsoft's biggest advantages may come in the area of distribution. While Google has no real experience, sales staff, or distributor network to reach out to millions of would-be customers, Microsoft has 3,500 sales reps. More important, about 650,000 companies around the world make some or all of their living reselling Windows and Windows-based applications, says corporate Vice-President Allison Wagner. The company will invest more than $5 billion this year in a variety of training programs and marketing seminars to help these partners, which range from Best Buy (BBY) to Accenture (ACN) to the mom-and-pop computer shop on the corner.
Google may have announced its intention to race Microsoft, but Redmond has the head start. Says NPD's Baker: "If Windows 7 goes as smoothly as it has so far, that's going to take away a lot of [PC makers'] concerns of needing to have multiple OS partners."