laptops

Microsoft's Chromebook headache

January 2, 2014: 9:01 AM ET

Redmond can bash Google's $199 laptop all it wants, but a look at holiday sales suggests that people aren't listening.

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FORTUNE -- When Amazon released its list of holiday bestsellers the day after Christmas, the second-most popular laptop was the Asus Transformer, a Windows 8 laptop with a detachable keyboard that converts into a tablet. It's just the kind of portable consumer device that Microsoft (MSFT) desperately needs to be a hit.

So was the Amazon announcement good news for Microsoft? Not quite. As it turns out, the first- and third-bestselling laptops at Amazon over the holidays were not Windows PCs. They were Chromebooks, the stripped down, web-only machines that Google (GOOG) and partners like Acer, HP (HPQ), Lenovo, and Samsung have been peddling for two years as an alternative to full-fledged laptops.

Chromebooks aren't just any PC alternative. They're the one Microsoft has worked hard to discredit as a mere toy. Chromebooks feature prominently in Redmond's "Scroogled" marketing campaign, a much-criticized series of attack ads on Google's products and business practices that Microsoft launched in November 2012. In the Chromebook "Scroogled" ads, actors disparage the Google-powered laptops for not being able to run Windows or popular programs like Office, iTunes, or Photoshop, and for being "pretty much a brick" when not connected to the Internet.

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The Scroogled campaign had initially targeted Google's dominant search engine and its controversial privacy practices. The new focus on Chromebooks ahead of this holiday season was a bit of a head-scratcher for me at first. After all, the Google-powered machines had struggled to gain traction with consumers.

But a story close to home gave me reason to think that Chromebooks are the latest headache for Microsoft, which has struggled to gain traction in phones and tablets at a time when growth in the PC market has stalled. At the public elementary school that my two sons attend in Oakland, the parent teacher association, on whose board I serve, recently decided to purchase 36 Chromebooks for students in the fourth grade. A few weeks later, we received news that the school district would purchase an additional 70 or so Chromebooks -- and would upgrade the Wi-Fi in the school so all the new machines could work simultaneously. This allows half of fourth and fifth graders to work on computers at any one time, if their teachers decide it's appropriate.

What was striking was not so much that a school in an urban district would purchase 100 Chromebooks, but that there was never any discussion of purchasing Windows machines. When an alternative to the Chromebooks was discussed, the conversation was about Macs -- of which there are several in the school library, media lab, and some classrooms -- or iPads.

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It's not hard to see why our PTA and the school district opted for Chromebooks. Sure, they don't have Office. But they do have the free Google Docs, which is an easy-to-use alternative and sufficient for most tasks required of elementary school students. As for the lack of Windows -- or for that matter MacOS -- that's actually an asset for the cost-sensitive school environment. The machines boot up immediately, they can be shared easily amongst students, they never have to be upgraded or backed up, and they are always up to date. Oh, and at prices ranging between $200 and $300 for popular models, they're more affordable than most alternatives. (In a blog post on the educational website edSurge, Greg Klein, director of blended learning at the Rogers Family Foundation, which advises the Oakland schools on technology solutions, lays out the benefits of Chromebooks in the classroom in more detail.)

This is purely anecdotal, of course, and I suspect there are plenty of schools that are choosing Windows machines. But Google's Chromebooks are clearly making inroads, and getting an important demographic -- millennials -- hooked on their software and services at an early age. And as The Verge, a prominent tech blog, recently noted, it is Google's threat to Microsoft's lucrative software and services, more than hardware, that has Redmond worried.

The Scroogled campaign doesn't seem to be working and may even be backfiring for Microsoft. Last week, the NPD Group reported that 21% of all notebooks sold through resellers, which are mainly purchased by organizations like businesses, educational institutions, and government agencies. In 2012, Chromebooks had a "negligible" share of the market, according to NPD, and the surge represented the largest share increase among any product category. In an interview, Stephen Baker, vice president of industry analysis at NPD, said Chromebooks are being purchased as an alternative to both low-cost PCs and tablets. "Chomebooks have been very successful," Baker said. "There was clearly a market demand."

By this week on Amazon.com, the Asus Transformer had slipped to No. 3 in the laptop category behind two Chromebooks from Acer and Samsung. It all suggests that the one getting Scroogled is Microsoft.

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