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Google Eyes Opportunity in Operating Systems

Until now, most consumer PCs have run on software from one of two companies: Microsoft or Apple.

But on Wednesday, search giant Google shook up the computing world by formally announcing plans to compete head-to-head against those companies on their home turf: PC operating systems.

Google gave notice that it's developing its own PC operating system initially targeted at netbooks, those pint-size, inexpensive PCs currently selling like hotcakes. Google is meeting with hardware manufacturers and hopes to have it on computers by the second half of 2010.

Google's goal is to be the opposite of today's operating systems - especially Windows, which commands 90% of the market. The ubiquitous software has a reputation as virus-prone and complicated. Google says its Google Chrome Operating System will be faster, smoother and lightweight.

An outgrowth of Google's Chrome Internet browser, the OS is designed "to start up and get you onto the Web in a few seconds," Google said in its official blog post announcing the product. Google says it can achieve that by building a system from the ground up, one that isn't constrained by working with a legacy system initially built in the 1980s.

Now, all it must to do is execute.

Unlike Windows, Chrome is an open-source project like the Linux operating system that's popular with techies, which means outside software developers are welcome to work on it. And Google believes developers who have a stake in the project will find a way to bring Chrome to a wide variety of PCs quickly, says a person with direct knowledge of Google's intentions, who isn't authorized to speak on behalf of the company.

Love it or hate it, Microsoft sells some 400 million copies of Windows annually. PC manufacturers - Dell, Hewlett-Packard, Lenovo, Acer, Toshiba and more - offer Windows on most PCs. When Microsoft comes out with a new operating system - as it will in the fall with Windows 7 - that's what most consumers get when they purchase a new PC. Microsoft declined to comment on Google's announcement.

But Google's operating system will be free, compared with the average $45 per machine manufacturers pay for Windows.

"Microsoft has a real problem," says Charles Wolf, an analyst with Needham & Co. "HP can now say to Microsoft, 'We've got a great operating system (Google) that doesn't cost us anything - what are you going to do about it?' " Linux, too, is sometimes free, but it can be hard to use.

Still, for consumers, "The learning process of any change is so substantial, most people will resist it, unless Google can really show a compelling reason," says Phil Leigh, an analyst for Inside Digital Media. "Most will stick with what they know."

The battle is on

Google has been locked in a battle with Microsoft for years.

Microsoft urges consumers to use its MSN.com as a home page on the Web, to make its new Bing (formerly Live) their search engine of choice, and to use its Internet Explorer browser, effectively bypassing Google.

Google - the most visited website worldwide - countered last year with Chrome, its own browser. It says some 30 million people are using it now.

Don't like Microsoft's Office software? Google offers online word processing, spreadsheet and presentation programs that are free.

Microsoft, which has been trying to catch up to Google's dominance of search advertising (5.5% vs. 72% market share in April, according to Hitwise), recently launched Bing, a well-received search overhaul that's been advertised heavily.

In reaching for Microsoft's cash cow, the operating system, analysts say, Google is in for a tough haul.

"Google will find that it's much harder than it looks," says Roger Kay, president of Endpoint Technologies Associates. "There're all those drivers and devices that have to be supported."

Microsoft has huge customer service departments. As anyone who's ever tried to contact Google knows, there are no customer service reps to call on the phone.

Microsoft is unaccustomed to having operating system competitors, but Kay says "it will do whatever it can to fight back."

Chrome isn't Google's first operating system. With more consumers conducting searches on mobile devices, Google launched Android, an operating system for phones.

The clash of tech titans has rekindled questions about whether either has what it takes to diversify beyond their respective core businesses. Microsoft, for instance, continues to derive some 80% of its revenue from selling the Windows operating system and Office suite; this despite pouring billions into search advertising, online services, video games and other businesses.

Similarly, Google gets 97% of its revenue from online advertising, despite multiple attempts to diversify with Google Apps, instant messaging, photo-editing software and Android.

Android could get to a netbook before Chrome does: Upstart PC maker Acer announced in June that it would begin selling Google netbooks in October based on Android. Acer declined to comment for this story.

Taking it online

Trip Chowdhry, an analyst at Global Equities Research, says Google will begin getting netbook customers by targeting the 60 million users of its Gmail e-mail service. "The influencing power will be on the company that can provide a branded and exceptional online experience."

Microsoft sells 400 million copies of Windows yearly. "Can that 400 million become 800 million?" asks Chowdhry. "Not likely. Can Google's 60 million grow to 1 billion? Yes."

Matt Rosoff, an analyst at research firm Directions on Microsoft, says Google will need to counter Microsoft's strong marketing and consumer support with efforts of its own.

"It will need to devote serious marketing resources to explain to average consumers, not just tech enthusiasts, why they'd want this new OS," he says.

Analysts see Apple getting hurt by Google's challenge, as well.

A Google netbook at $300 would be $700 less than Apple's current entry-level laptop, the $999 MacBook.

"The growth in the market is coming from netbooks, and Apple's been missing that," says Gene Munster, an analyst with Piper Jaffray. "We believe Apple will respond with a netbook in the first quarter of next year - but it will be more expensive than Google's."

Meanwhile, Microsoft is going to be anything but quiet this year. It can fall back on deep relationships with software developers and retailers. And it will almost certainly tweak pricing and features of Windows 7 to compete, Rosoff says.

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