Google's plan to offer free operating system may lead to lower PC prices

GOOGLE’S BID to compete with Microsoft’s Windows operating system may help to lower the cost of personal computers at a time when prices are already being pinched by inexpensive netbooks.

Google says it will offer its Chrome operating system for free when it is launched in the second half of 2010, a move that could force Microsoft into a price war.

Although Windows is the dominant operating system – installed on 90 per cent of the world’s PCs, Microsoft won’t take Google’s challenge lightly, analysts say. Its new Windows 7 operating system will be available in October.

“Microsoft’s strategy is likely to be to compete on price,” says Brent Williams, an analyst with the Benchmark. “Now there’s a competitor with the muscle and the brand recognition.”

Google says Chrome OS, which is based on the open-source Linux code, is being designed for all PCs but will debut on netbooks. It makes sense for Google to initially target the stripped down, web-centric netbooks, one of the only segments showing any growth in the contracting PC market.

Netbooks sell for $300-$400, but prices are falling as new offerings flood the market and wireless carriers offer subsidies with the purchase of a data plan.

Kaufman Bros analyst Shaw Wu notes that while prices of nearly all PC components have fallen, “the one thing that has not been coming down is the cost of the operating system. This is going to put some pressure on Microsoft”.

Microsoft does not say how much it charges PC brands for Windows, but analysts estimate it gets $20-$40 for the older XP system used in the vast majority of netbooks and at least $150 for the current Vista system.

Mr Wu says price competition could ultimately give a bump to PC makers’ margins. “I think overall it should improve the profitability for PC vendors. It’s really a question of how much they pass on to the customers.”

Between 20 million and 30 million netbooks are set to be shipped this year and the devices rewrite the rules for the PC industry.

Even as heavyweights like Hewlett-Packard and Dell roll out new netbooks, analysts expect new players, including Taiwan-based equipment manufacturers and carriers like ATT, to release branded netbooks running on either Intel’s x86 chip platform or ARM chips. Google says Chrome will work on either architecture.

Collins Stewart analyst Ashok Kumar is sceptical that Chrome poses any near-term threat to Microsoft, but he expects the company to react. “Microsoft will be flexible in pricing to respond to any challenge,” he says. – (Reuters)