GOOGLE-MICROSOFT WAR MAY BRING DOWN PC PRICES

Google Inc's bid to compete with Microsoft Corp's Windows operating system may help lower the cost of personal computers at a time when prices are already being pinched by inexpensive netbooks.

Google said it will offer its just-announced Chrome operating system for free when it is launched in the second half of 2010, a move that could force Microsoft into a price war.

Although Windows is the dominant operating system -- installed on 90 percent of the world's PCs, Microsoft won't take Google's challenge lightly, analysts said. Its new Windows 7 operating system will be available in October.

"Microsoft's strategy is likely to be to compete on price," said Brent Williams, an analyst with the Benchmark Co. "Now there's a competitor with the muscle and the brand recognition. Google is that company."

Google said Chrome OS, which is based on the open-source Linux code, is being designed for all PCs but will debut on netbooks. It makes sense for Google to initially target the stripped-down, Web-centric netbooks, one of the only segments showing any growth in a PC market that is contracting.

Netbooks generally sell for $300 to $400, but prices are dropping as new offerings flood the market and wireless carriers offer subsidies with the purchase of a data plan.

Kaufman Bros analyst Shaw Wu noted that while the prices on nearly all PC components have been falling, "the one thing that has not been coming down is the cost of the operating system. This is going to put some pressure on Microsoft."

Microsoft doesn't say how much it charges PC brands for Windows, but analysts estimate it gets $20 to $40 for the older XP system used in the vast majority of netbooks, and at least $150 for the current Vista system.

Wu said price competition could ultimately give a bump to PC makers' margins.

"I think overall it should improve the profitability for PC vendors. It's really a question of how much they pass on to the customers," he said.

Rewriting the rules

Between 20 million and 30 million netbooks are expected to be shipped this year, and the devices continue to rewrite the rules for the PC industry.

Even as heavyweights such as Hewlett-Packard Co and Dell Inc roll out new netbooks, analysts expect new players, including Taiwan-based equipment manufacturers and carriers such as AT&T Inc, to release branded netbooks running on either Intel Corp's x86 chip platform or ARM chips.

Google said Chrome will work on either architecture.

The company said its Chrome team is working with PC makers including HP, Lenovo, Acer and Asustek, and chipmakers such Qualcomm and Texas Instruments to design and build devices.

Dell did not return a call seeking comment. Microsoft has not commented on Google's move.

Collins Stewart analyst Ashok Kumar was skeptical that Chrome poses any near-term threat to Microsoft, but he expects the company to react nonetheless. "I think Microsoft will be flexible in pricing to respond to any challenge," he said.

"Over time I think that Linux will gain traction, and as more carriers jump on this netbook opportunity, Google might provide them a way to differentiate their platform. But this is just the first stage of a marathon," he added.

Gartner analyst Michael Silver said Google's move does present some risk to Microsoft, but he was doubtful the software giant would cut the price of Windows any time soon.

"Microsoft is a bit limited because what they do for one they have to do for everybody .... If they see it as a threat they'll respond. But netbooks have been shipping with Windows XP for a while and have actually been doing quite well compared with Linux, even though they're more expensive."