source:http://online.barrons.com/article/SB124726722483025477.html

The Folly of Google's Latest Gambit

By ERIC J. SAVITZ | MORE ARTICLES BY AUTHOR

Microsoft to Google: Can't touch this.

TEXT SIZE

GOOGLE IN ITS SHORT LIFE HAS PROVED INCREDIBLY talented at searching the Internet and selling ads. For all the other useful services it offers-e-mail, maps, YouTube, etc. -- it has produced no other financial successes. Nonetheless, it keeps cranking out products, aimed at getting people to spend more time searching the Web-and generating ad impressions.

In perhaps its most daring move, Google (ticker: GOOG) last week unveiled plans to move into the PC operating-system business, taking direct aim at technology's best franchise: Microsoft Windows.

It is a little hard to imagine this quixotic project -- dubbed Google Chrome OS -- will be very successful, for reasons I will discuss in a moment. But it certainly isn't hard to see why they are going to try: The stakes are extremely high. Windows generates $15 billion in annual revenue. It's the heart and soul of Microsoft (MSFT), the centerpiece of Bill Gates' dream to put a PC on every desktop. Other operating systems exist, but none have much traction in PCs. Apple refuses to license OSX for the PC market; Linux is a tiny player in desktops and laptops. Desktop Solaris, anyone? No thanks. Buy a PC, and what you get is a box to run Windows.

Were Google to win a modest share of the PC operating-system market, it would gain a huge edge in the battle for control of the computing universe. But it won't be easy. Google has challenged Microsoft before, to little avail. Gmail is useful but has hardly dented the combination of Outlook and Exchange. Google Apps, an early bet on cloud computing, has barely put a glove on Office.

Google will open-source the Chrome OS software, and give it to PC companies for nothing. That is certainly an alluring price, which is no doubt why Acer (2353.Taiwan), Lenovo (0992.Hong Kong), Asustek Computer (2357.Taiwan), Toshiba (6502.Tokyo) and Hewlett-Packard (HPQ) have signed up to work with Google on the project. If nothing else, the threat of a free Google OS could pressure Microsoft to cut the prices it charges these companies for Windows.

STILL, THE PROJECT IS A LONG SHOT. The software won't be available for a year or so-a year during which Microsoft will be cranking out Windows 7, a well-reviewed and eagerly awaited version that debuts in October. Buggy, much-maligned Vista would have been an easier target; too bad Google didn't make the effort a few years ago.

OS SOS: Google plans an operating system to compete next year against Microsoft Windows. The Nasdaq index finished Friday at 1756, off 2.3% for the week.

I think Google misunderstands the nature of netbooks, which simply are small, cheap, lightweight PCs. Early versions ran Linux, and didn't sell. Once the netbook companies loaded them with Windows, sales picked up. On its last earnings call, Microsoft noted that the attach rate for Windows on netbooks had reached 90%. The people have spoken. Netbooks are a misnomer; while people do use them to connect with the Web, they use them for a lot of other things. Customers want netbooks to run standard software, including Office. And I doubt there will ever be a version of Office for Chrome OS.

As Vista demonstrated, an operating system can be a tricky beast. Google claims Chrome will be fast-loading, clean and virus-free. Nice, but I also want it to support my printer, work with iTunes and let me play cool games. And I want it to do useful work when I have no Web access. Google already had an OS, Android. First targeted at smartphones, Android is also going to show up in netbooks. Two new operating systems with overlapping markets? Really?

Google's decision to attack Windows comes just weeks after Microsoft's launch of Bing, a well-received search engine that is attacking Google at its core. Data from Hitwise shows Microsoft in June saw usage of its new search engine increase an average 25% a week sequentially through the month. Microsoft's task is more manageable. Search engines aren't that sticky. Operating systems require a commitment.

The boys in Redmond are holding the better hand.

E-mail: eric.savitz@barrons.com; twitter: www.twitter.com/savitz