Cloud PCs & Chromebooks: Microsoft's Hardware Strategy?

The Potential for a Cloud-Based Windows Operating System

Microsoft’s recent unveiling of Windows 365 has sparked consideration regarding the future of Windows itself. While currently focused on delivering a virtualized Windows desktop via the cloud, this announcement may signal the emergence of a streamlined, cloud-dependent version of Windows – a concept that has been discussed for quite some time.

Windows 365 and the Chromebook Comparison

The Windows 365 launch wasn’t centered around new hardware. Instead, it involves fully virtualizing a Windows desktop and hosting it in the cloud, enabling access from any location and replicating the user’s familiar PC environment. However, envision extending this concept by combining Microsoft 365 applications with a budget-friendly PC and utilizing the Edge browser as the primary interface. This could directly challenge the Chromebook market.

Google has successfully implemented this approach with Chrome and Chromebooks for over a decade. They collaborate with hardware partners to offer affordable devices where the majority of processing occurs in the cloud. The Chrome browser functions as the core desktop environment, and Google Workspace provides the standard office applications, alongside email and calendar services. Furthermore, Chrome supports any web-based service, including Microsoft’s cloud-based office tools. The result is a cost-effective laptop, largely powered by cloud resources.

The Shift Towards Simplicity and Cloud Computing

A significant portion of users do not require the capabilities of a high-end notebook computer. The hardware necessary to run complex operating systems contributes substantially to the overall cost of the device, a realization Google made some time ago. By simplifying the system to a browser, an office suite, and web access to essential tools, users can achieve their needs without the complexities of managing a traditional PC operating system.

Consider individuals who primarily use email, office applications, and streaming services. A device tailored to these needs would be ideal, avoiding excessive costs or unnecessary complexity.

Chromebook's Rise in Popularity

The onset of the pandemic last year, and the subsequent need for remote work and learning, drove demand for affordable computing solutions. Chromebooks experienced a surge in sales, exceeding 30 million units, including over 11 million in the final quarter of the year, as reported by Canalys.

Even with a slight slowdown in growth during the first quarter of this year, Canalys data indicated a 275% increase in Chromebook shipments. Brian Lynch, a Canalys analyst, noted that Chromebooks have become a “mainstream computing product,” with their popularity extending beyond the education sector to include consumers and businesses.

Competition in the Cloud PC Space

Windows has also performed well, but the substantial number of Chromebooks sold – particularly by Lenovo and HP, both manufacturers of Windows-based machines – suggests that a Windows-based cloud PC could present significant competition.

While low-cost Windows PCs are available, such as those found at Walmart for around $149, they still operate as full-fledged Windows PCs, requiring the associated management overhead. Chromebooks, from both an IT and personal use perspective, are demonstrably easier to manage.

Microsoft's Cloud-First Strategy

Since Satya Nadella assumed the role of CEO at Microsoft in 2014, the company has demonstrated a clear commitment to shifting its focus from the traditional PC market to the cloud. This strategic move has proven successful, with Microsoft’s market capitalization recently surpassing $2 trillion.

Furthermore, Microsoft’s share of the cloud infrastructure market has more than doubled since 2014, now standing at approximately 20%. The company’s cloud office suite market share has also grown from around 16% in 2014 to 40% currently. Google Workspace currently holds the largest share, at nearly 60% according to Statista, a position bolstered by Chromebook sales.

The Future of Windows

To challenge Google’s dominance in the cloud office suite market, Microsoft could develop a cloud-based notebook resembling a Chromebook, but with a Windows foundation. This would potentially diminish their traditional desktop OS market share, but, similar to the shift in 2014, it could represent a trade-off – exchanging a market with declining returns for one with greater future potential.