- Google is the leading operating system provider in most consumer electronics markets.
- The low-cost Chromebook and new disruptive initiatives are Google’s attempts to gain significant market share in the PC market.
- The convergence of Google’s dual open source operating system and challenging Windows' low-end segments should drive Chromebook sales in the upcoming years.
- A 4.2% market share in the PC market in 2017 should put Google on the right track to completing the missing piece of the Android ecosystem.
Tech and Internet giant Google (NASDAQ:GOOG) plays a central role in many consumer electronics markets by executing its combined software/hardware strategy. By taking this approach, Google independently develops a free distributed operating system and co-develops with a leading OEM a hardware device optimized for that operating system. Google generates revenues from this strategy through Google Play Store purchases, takes a small portion of the hardware device sales, and any advertising service associated with Android. As shown in chart 1 below, this plan worked out extremely well in the smartphone market, where Android holds a 77% market share, and in the tablets market, where Android leads the market with a 48% share.
Google is also gaining substantial market share in market of smart watches, smart TVs, wearables, and media streaming, and is in the process of introducing a dedicated version for the autonomous vehicles market and the virtual and augmented reality market. However, in the traditional PC market, of which Windows dominates more than 90%, Google’s initial strategy could not generate significant sales volume.
Google’s Challenges in the PC Market
Unlike other consumer electronics markets, the PC market is mature, with a historical ecosystem powered by Microsoft (NASDAQ:MSFT) Windows or Apple (NASDAQ:AAPL) OS X, which may be hard to disrupt. Google entered the PC operating system market five years ago with the launch of the first Chromebook and failed to win in this market the way it did in other markets. (Also See: PC Upgrades Will Drive Microsoft, Apple Growth In 2015)
Google’s first challenge in the PC market is its confusing dual open source operating system. Google did not create a dedicated PC version of its successful Linux-based Android OS. Instead, it created a separate operating system called Chrome OS. Chrome OS users download apps from the Chrome Store and not from the Android Play Store, and Android apps cannot run on Chrome OS. Having two sets of operating systems — one for PCs and the other for every other device — creates a continuity problem in Google’s ecosystem, which was supposed to include all computing devices. If Chrome OS has no added value for Android users, they have no reason to prefer these computers over Windows or Apple, other than the price.
Unlike other markets that Google has penetrated, the PC market is mature and beyond its peak. Google is joining the PC market years after its glory days and when new devices are cannibalizing its sales volume. Google’s strength is in joining an evolving market and winning it over with the software/hardware strategy mentioned above, but the PC market is different from other markets. Both Microsoft and Apple created and maintained strong ecosystems for many years with clear differentiation between them in order meet the different needs of PC users. Breaking this years-long relationship between PC users and their favorite software vendor is not a simple move to make, even for Google.
Google’s Solutions to Its PC Struggle
In order to solve its inherent problem in penetrating the PC market, Google decided to focus on the evolving e-learning segment at the beginning. According to Gartner, 85% of the Chromebook sales are for the e-learning segment. Consumers in that segment are looking for a PC with a good enough performance by a recognized brand that meets their budget, and the sub-$300 Chromebook meets these requirements. Sales in the e-learning segment may help to penetrate the PC market, but in order to grow its market share at the expense of Windows and OS X, Google needs to break out of the e-learning segment.
The first thing Google needs to do is to begin convergence between Chrome OS and Android, which is aimed to solve the first challenge mentioned above and bring PCs into Google’s Android ecosystem. In late 2014, Google started to bring popular Android apps to the Chromebook with a clear target to create a seamless experience between an Android device and a Chromebook PC. Through its App Runtime for Chrome (ARC) project, Google invites developers to adjust their popular Android apps to fit the Chromebook PC. While it is far from a true convergence between the two operating systems, I believe this is the first step towards merging Chrome and Android and ending the dual open source operating system strategy.
As I mentioned above, the PC market is mature, and Google needs to use extreme measures to disrupt it. Two initiatives in that direction were announced recently: the Chromebit and the $149 Chromebook. The Chromebit is a sub-$100 HDMI dongle that contains the guts of a Chromebook and allows users to turn every display into a Chromebook PC. Users can connect peripherals like keyboards or mouses using a USB port or Bluetooth connection. The Chromebit revolutionizes the way we use our PCs and turns every display into a possible computer. When every display can be turned into a Chromebook and use Cloud-based apps, consumers looking for low-cost, low-end computers can buy a Chromebit to satisfy their needs instead of a PC. Customers looking for a traditional PC for a small price can purchase the cheapest computer available on the market: the $149 Chromebook by Haier or Hisense. By offering the ultra-low-cost Chromebook, Google is challenging the low-end Windows-based PCs and risks the Microsoft market share in the low-end computers.
As shown in Chart 2 below, Google is expected to ship 14.4 million Chromebooks by 2017, which reflects a 4.2% market share that year. Even though it is far from challenging Microsoft Windows or Apple OS X, Google would have increased the Chromebook shipments 12x between 2012 and 2017.
Assuming Google’s latest initiatives will lower the Chromebook's average selling price to $180, the gross revenues potential of this segment is $1.3 billion in 2015 and $2.3 billion in 2017, divided between Google, OEMs, and distributors. If Google could reach a 10% product margin on Chromebooks and could generate another 10% from Play Store sales, it could reach almost $0.5 billion of revenues from Chromebooks in 2017, which is a substantial amount, even for Google.
Increasing Chromebook shipments and rising interest in the ARC projects indicate that Google is heading in the right direction. I believe that the process started with the ARC project and will end with merging the two operating systems, completing Google’s missing piece of the Android ecosystem across all computing devices. The minimal revenue to be gained by this move is $0.5 billion in 2017, and possible additional initiatives could increase that amount.
As this is just one aspect of Google’s many businesses, existing Google investors looking at the long-term should be optimistic about the revenue potential of the Android business and should hold on to their positions in Google stock. (Also See: Google Stock Analysis)
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