Google (GOOGL) Is Taking on Microsoft's (MSFT) Windows Cash Cow, and the Stakes Are High - TheStreet

Updated from Jan. 23 to note the launches of new solutions by Microsoft and Google for education market PC buyers.

Compared with Android, Alphabet/Google's (GOOGL) - Get Report Chrome OS has been a fairly low-key success story. After all, its position in the PC market can't compare to what Android has achieved in mobile, and it has fairly tiny share of the high-end segment, which tends to get an outsized amount of media attention.

Nonetheless, thanks to its strength in a handful of verticals, Chrome OS has grown to the point where it can legitimately be considered a thorn in Microsoft's (MSFT) - Get Report side. And its threat to Redmond's still-very-lucrative Windows business is about to get bigger.

On a web page listing Chrome OS systems supporting Android apps, Google states all Chromebooks "launching in 2017 and after" will run apps built for its mobile OS. The announcement comes seven months after the first Chromebook to support Android apps found on the Google Play store -- Asus' Chromebook Flip, available for $229 on Wal-Mart's site -- hit the scene.

On Tuesday, Google followed up on its disclosure by announcing Adobe (ADBE) - Get Report has optimized several of its popular Android apps, including Photoshop Mix and Lightroom Mobile, for Chromebooks. The company also unveiled the Acer Chromebook Spin 11 and the Asus Chromebook C213, a pair of Chromebooks with touchscreen displays and stylus support. Android's giant tablet presence makes the fusion of Android apps with Chrome OS an intriguing solution for convertibles that can work as both PCs and tablets.

The moves come after Samsung unveiled a pair of more powerful Android-capable Chromebooks at CES three weeks ago. And they follow rumors Google has plans to launch Andromeda, a version of Android that integrates many Chrome OS features, later this year. Android Police has reported that Google will launch the Pixel 3, a $788 Andromeda notebook sporting a 12.3-inch display and tablet/stylus modes, in the third quarter.

Though it will take some time for popular Android apps to be optimized for devices relying on physical keyboards and mice/trackpads for input rather than a user's fingers, there's clearly a lot of value in making the 2 million-plus Android apps available on Google's PC OS platform. Moreover, given Android's ubiquity -- over 1.2 billion Android phones were likely sold in 2016 alone -- much of the world's smartphone-using population is already familiar with Android's interface. A lot of these users could also derive value from the syncing of popular Android apps and services between their mobile devices and PCs.

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One other trend working in Google's favor: The incredible shift of consumer computing activity from PCs to mobile devices. comScore estimates 67% of all U.S. digital time spent now involves mobile devices (58% on mobile apps), and it's safe bet that the number is also over 50% in many big overseas markets. In addition to affecting PC upgrade rates, this likely makes many consumers (particularly on the low-end) less demanding in terms of the feature set and app support they demand from a PC. That, in turn, benefits a cheap, streamlined, performance-optimized platform like Chrome OS -- something that can provide essential apps and services, and "just works" -- over a costlier incumbent platform such as Windows.

Microsoft, of course, isn't oblivious to these trends. The company has already slashed license fees for both cheaper and smaller Windows devices, and has given developers the ability to create "universal" touch-optimized apps that can run on and be synced between PCs, tablets, phones and Xboxes. In addition, the company's Surface tablet/notebook hybrids have gained a strong following in the enterprise, where Chrome OS/Andromeda will be a tough sell with businesses wary of devoting resources to supporting a brand-new platform.

On Tuesday, Microsoft continued its efforts to battle Google by announcing several sub-$300 touchscreen Windows 10 notebooks from hardware partners that it insists are "great alternatives to Chromebooks" for education market buyers. The company also unveiled Intune for Education, a cloud-based app and device management service (a derivative of the company's standard Intune device/app management solution for businesses) meant to make it easier for schools to handle large Windows PC deployments.

But while Windows' enormous global presence and app ecosystem guarantees it will remain a force to be reckoned with in the low-end PC market, Microsoft's miniscule mobile OS share limits the cross-device value of its universal apps in a way that won't be the case for Android apps running on both mobile devices and Chromebooks. And it's hard to ignore what Chromebooks have accomplished so far: IDC believes they outsold Macs in the U.S. on a unit basis for the first time in Q1 2016, and reported they had "another banner quarter" in the education vertical in Q3. Gartner forecast last July Chromebook shipments would rise 18% in 2016 in spite of a weak PC market.

For Apple (AAPL) - Get Report, Chromebooks are a more indirect threat for now. Mac sales skew far more towards the high-end than Chromebook sales do, and the strong customer loyalty shown by MacBook owners, not to mention their investments in MacOS apps, and the fact so many of them are iOS rather than Android users, makes it unlikely a lot of them will embrace Chrome OS, with or without Android apps. But Google's PC efforts do represent a challenge to the iPad Pro, given Apple's attempts to promote the latter as a PC alternative.

For Microsoft, the stakes are certainly quite large, given that Windows licenses likely accounted for the lion's share of the $6.1 billion in operating income delivered by the company's More Personal Computing segment in fiscal 2016. And though Chrome OS (like Android) is provided for free, the stakes are high for Google as well, given all of the ad sales and Google Play transaction revenue it can derive from a device that has its core apps and services baked in.