Traders short shares of Hewlett-Packard Company (NYSE:HPQ) were crushed Thursday following the company’s earnings report. Some investors, like famed short seller Jim Chanos, had reasoned that the death of the traditional PC would mean a much less valuable HP.
Although PC sales have declined tremendously, both industry-wide and at Hewlett-Packard Company (NYSE:HPQ) in particular, the company has been able to offset its PC weakness with other initiatives.
Some of those initiatives include tablets powered by Google Inc (NASDAQ:GOOG)’s Android. Although HP is not planning to abandon Windows anytime soon, could Microsoft Corporation (NASDAQ:MSFT)’s PC dominance give way to Google Inc (NASDAQ:GOOG)’s mobile operating system?
HP’s move to Android
Hewlett-Packard Company (NYSE:HPQ)’s PC-related revenue dropped 20% in the second quarter compared to the prior year. The company’s CEO, Meg Whitman, attempted to downplay the disastrous decline, by noting that it was in the context of an industry-wide trend:
In personal systems, against the backdrop of dramatic overall PC market contraction, we saw revenue decline 20% over the prior year…If you were to normalize the market share results for this by comparing the first half of 2013 to the first half of the prior year, Hewlett-Packard Company (NYSE:HPQ) would have held share and gained share in commercial and desktop segments.
How does Hewlett-Packard Company (NYSE:HPQ) hope to boost its PC division? According to Whitman:
Using multiple operating systems, multiple architectures, and multiple form factors, we are moving quickly to produce the devices that customers want.
But phrasing it as an embrace of “multiple” operating systems is putting it lightly. In reality, HP is just getting into the Android and Chrome OS — Google Inc (NASDAQ:GOOG)’s operating systems:
Following the launch of our first Chromebook in February, we launched the new Slate 7 in the second quarter…[Slate 7 runs on the] Android platform to deliver a compelling mobile device at $169…just last week, we introduced the HP Slate Book X2, the first Android hybrid device…The Slate Book X2 provides users with more realistic gaming, faster web browsing and smoother HD video playback.
Android to take over the world?
Research firm Gartner predicted in early April that Android would come to overwhelm Windows PCs by 2017. According to Gartner, people are increasingly coming to identify their smartphone as their primary computing device, and adding secondary devices — like tablets — in line with their smartphones.
In terms of mobile operating systems, Android dominates on a global basis, mostly because it’s free — consumers in developing nations can actually afford Android devices. On the high-end too, Android has started to gain traction against Apple Inc. (NASDAQ:AAPL)’s iOS devices, with premium offerings from Samsung and HTC.
Obviously, there’s plenty of reason to doubt Gartner’s outlook. Microsoft Corporation (NASDAQ:MSFT)’s Windows remains a necessity for many — in particular, large corporations and government agencies — but HP’s decision to embrace Google Inc (NASDAQ:GOOG)’s operating system lends credence to Gartner’s report.
How much money does Google make off Android?
If Google Inc (NASDAQ:GOOG)’s Android really was to replace Windows as the dominant PC operating system, it’s worth asking: how profitable is Android? What could Google gain by owning the dominant OS?
On a pure basis, Google makes nothing off Android — it is, after all, free — but as with all “free” products, it isn’t that simple. Users of Android are much more likely to use Google’s other web services — gmail, Google Docs, Google Music and so forth. And thus, Android really sort of functions as a Trojan horse, getting its users to make Google’s services a key part of their digital lives.
Some people have cited court data to determine Android’s monetary value. According to legal documents from Google’s battle with Oracle Corporation (NASDAQ:ORCL), Android directly generated about $550 million for Google from 2008-2011.
But Android’s growth has been non-linear — it has exploded in popularity in just the last two years. Further, it’s hard to really quantify how much having a powerful online ecosystem is truly worth. For example, what is the value of getting a user to make the switch to gmail? Or to use Google Docs in place of other cloud storage solutions?
It’s hard to put an exact dollar figure on Google’s benefits from Android. But having Android as the world’s dominant operating system would significantly strengthen the company’s grasp on the Internet, and the possibilities that opens are boundless.
Microsoft is fighting back
Microsoft Corporation (NASDAQ:MSFT) has taken the criticism of its latest operating system, Windows 8, to heart. The company is planning to roll out an update which would restore Window’s classic start button, while allowing users to boot straight to the desktop (bypassing the metro interface).
But is this really enough? According to the Gartner report, it’s really the desktop form factor that’s dying, not just Windows.
Microsoft Corporation (NASDAQ:MSFT) has ventured into the mobile space with Windows Phone and Windows 8 RT, but both have fallen short. Windows Phone remains far behind both Android and iOS in terms of market share, while Windows RT has been widely panned by critics and industry insiders (Dell just cut the price on its Windows 8 RT tablet by $200).
But just because Windows dies, doesn’t mean Microsoft Corporation (NASDAQ:MSFT) has to. Hedge fund ValueAct, for example, argues that in the grand scheme, the Windows business is irrelevant — the real story is Microsoft’s foray into cloud computing via its Azure product.
And while Google’s operating systems may be biting into Microsoft’s business, Microsoft is trying to do the same to Google, pumping money into Bing, Outlook (formerly Hotmail) and SkyDrive.
Of course, it’s worth pointing out that approximately 500 million people still use Windows XP — an operating system that was launched in 2001. The Windows business won’t vanish overnight.
Microsoft, Google and HP
By offering more devices running Google’s operating systems, HP should benefit, simply by giving businesses and consumers what they want. Of course, the fact that what they want is Android should help Google, as it looks poised to dethrone Microsoft as the dominant operating system company in the coming years.
But that doesn’t mean Microsoft is finished. Even if Windows truly did fade into irrelevancy, the company has made significant investments into its own web ecosystem and, more importantly, cloud computing.
The article Windows PCs Are Dying: This Might Be the Future originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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