Why Apple and Microsoft Should be Worried About Google's Chromebooks

By Markets Fool.com

Google Chromebooks outsold Apple iPads in U.S. schools during the third quarter of 2014, according to The Financial Timesand IDC -- 715,500 Chromebooks were shipped during those three months compared to 702,000 iPads.

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This was a major victory for Google, which saw its share of the U.S. educational market grow from nothing to 27.2% in just two years. IDC reports that Apple still controlled 30.9% of the market, while Microsoft retained 39.5%. The rise of Chromebooks, which cost as little as $199, is disappointing for Apple, which already reported declining iPad sales for three consecutive quarters. It's also a troubling development for Microsoft, which is trying to curb the growth of Chromebooks with equally cheap Windows 8.1 laptops.

Chromebooks. Source: Google.

Let's take a look at why Google is growing so quickly in the educational market and whether or not Apple and Microsoft can throttle its growth with fresh tactics.

Why Google is taking over classrooms
Google is winning in schools for two simple reasons -- its price and its cloud ecosystem.

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A recent scandal in the Los Angeles Unified School District highlights problems with selling iPads to schools. The $1.3 billion deal between the district, Apple, and educational software provider,Pearson,intended to give all students, regardless of income, access to iPads. However, students quickly hacked the iPads to install apps, $2.1 million in equipment went missing, and the district's contract became the subject of an FBI probe due to the superintendent's close relationships with Apple and Pearson executives.

That PR disaster likely convinced other schools to ditch the iPad Air, which cost $379 apiece after educational discounts, for the cheaper Chromebook. Microsoft is now trying to match that price with low-end Windows laptops like Hewlett-Packard's$199 Stream.

Earlier this year, Google introduced its free Google Apps for Education suite, a version of Google Drive designed for cloud-based collaboration on documents and projects. By comparison, Apple's iPad relies on specialized apps, lacks a physical keyboard for extended periods of typing, and its productivity apps (Pages and Numbers) are arguably less refined than Google Apps. Microsoft's Office 365 is comparable to Google Apps, but it's only free for students, not for schools.

Why Google can give its apps away for free
Google doesn't manufacture any Chromebooks, although it helps ship them. Hardware partners likeSamsung and Acer handle all the manufacturing.Google doesn't make any money directly from Chrome OS, which is a free, open source operating system like Android. This is different from Apple, which generates revenue from iPad sales, or Microsoft, which generates revenue by selling Windows and Office 365 licenses to schools.

Google is also giving away Google Apps for Education to tether more teachers and students to its ecosystem with Gmail accounts -- which allows them to log in to Android, Chrome, YouTube, Google Maps, Google+, and other Google services. Getting students hooked on Google's productivity apps early ensures that they rely on Google, not Microsoft's Bing or other search engines, to do their research. That feeds directly back into Google's core business -- search traffic and advertising revenue.

Why Apple and Microsoft should worry
Apple and Microsoft probably aren't worried yet, since the U.S. education market doesn't account for a huge chunk of their overall sales. iPads sold to U.S. schools only accounted for 5% of total units shipped during Apple's third quarter. Microsoft could bounce back by making Office 365 completely free for schools -- a gutsy play but one that is in line with previous decisions to make Office 365 free for iOS and Android devices.

But Google's core advantages of pricing and user-friendly cloud collaborations are hard to ignore. Google is also gradually merging Chrome OS with Android, which means that data and apps could soon be seamlessly transferred between Chromebooks and Android devices. Apple's "bridge" between iOS 8 and OS X, Continuity, only allows certain tasks to be handed off between devices. Microsoft's Windows 10 promises to unify mobile devices and PCs, but it won't launch until next year.

The hidden threat to Apple and Microsoft is that many start-ups are thinking in the same manner as schools. Google is already targeting small and medium sized businesses (SMBs) with Chromebooks at Work, which offers enterprise customers accessto its advanced Chrome OS management features and support for $50 annually per device. Chromebooks also have virtualization features, from VMWare and Citrix, which let Chrome OS users emulate certain Windows apps.

Why investors should care about Chromebooks
The rise of Chromebooks in U.S. schools is alarming for Apple and Microsoft, because it exposes the core weaknesses of iPads and Windows PCs.

Just as with smartphones and tablets, Google is showering the market with free operating systems and apps to gain market share against rivals which can't survive on the same business model. That could eventually pave the way for Chromebook sales -- which Gartner expects to nearlytriple by 2017 -- to surge and take a bite out of the SMB enterprise market as well.

The article Why Apple and Microsoft Should be Worried About Google's Chromebooks originally appeared on Fool.com.

Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and VMware. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.