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Google to Challenge Microsoft With Operating System (Update1)

By Brian Womack

July 8 (Bloomberg) -- Google Inc., owner of the most- visited Internet search engine, is developing a computer operating system based on its Chrome Web browser, taking aim at Microsoft Corp. in its strongest market.

The system will be designed at first for low-cost laptops called netbooks, Google said in a blog post. The company is in talks with partners on the project and computers running the software will be available in the second half of 2010.

The plan escalates Google’s rivalry with Microsoft, which extends to Web search, browsers and business applications such as word processing and spreadsheets. Windows, Microsoft’s flagship product, runs about 90 percent of the world’s personal computers. Google is also trying to spur Web-ad sales after reporting its first sequential revenue drop as a public company.

“There is a possibility that the new OS can break the paradigm Microsoft and Intel created over the past 20 years,” aid Yukihiko Shimada, a computer analyst at Mitsubishi UFJ Securities Co. in Tokyo. “There is plenty of business opportunity for Google in this market.”

Google said it’s working with computer makers to introduce a number of netbooks next year, without identifying any of the companies. The Chrome OS will be open-source, meaning the program code will be open to developers, Google said. The software will work on top of the Linux operating system.

Netbook Competition

Frank Shaw, a spokesman for Redmond, Washington-based Microsoft, declined to comment. Windows accounted for 28 percent of the company’s $60.4 billion annual revenue in the 12 months ended June 30, 2008.

Microsoft has stepped up its efforts in the netbook market. It said in May it plans to remove a restriction of running three applications at a time on its forthcoming Windows 7 Starter Edition, which is designed for netbooks. The announcement eliminated one of the most significant differences between the basic edition of the operating system and a pricier one.

Google, based in Mountain View, California, rose $7.21, or 1.8 percent, to 403.84 in Nasdaq Stock Market trading at 1:36 p.m. New York time. Microsoft fell 20 cents $22.33. Before today, Google had risen 29 percent this year and Microsoft had added 16 percent.

Online Strategy

The Chrome OS is consistent with Google’s focus on getting people to use software online, which contrasts with Microsoft’s approach of providing programs on the computer itself. Google started offering business software in 2007, allowing users to access spreadsheets and word-processing documents via the Web, just as anyone might access the search engine or Google News.

“We hear a lot from our users and their message is clear -- computers need to get better,” Google said. “The operating systems that browsers run on were designed in an era where there was no Web.”

Google is trying to encourage people to spend more time online to fuel demand for Internet ads, which accounted for more than 90 percent of its 2008 revenue of $21.8 billion. In the first quarter of this year, Google had its first sequential sales drop since it went public in 2004 as the recession prompted companies to curb advertising spending.

The open-source Chrome OS will probably win over companies that don’t want to pay for Windows, said Jim Friedland, an analyst at Cowen & Co. in New York. The system may also help Google sell Web-based applications, such as the Gmail e-mail service, that run on top of it, he said.

“They really haven’t cracked the enterprise yet,” said Friedland, who rates Google’s shares “outperform” and doesn’t own any. “We’ve seen some inroads around the edges.”

‘More Options’

Computer makers such as Acer Inc. and Asustek Computer Inc. already have plans to offer computers running Android, an open- source operating system backed by Google and initially designed for mobile phones. Acer, the world’s second-largest laptop maker, said last month it plans to release a low-cost notebook powered by Android. Asustek Computer has also developed a netbook that runs on Google’s software.

“Having another OS or another interface does create more options, and with the weight of the Google name behind it, does lift its prominence,” said Bryan Ma, a computer analyst at IDC in Singapore.

Google said that while the Chrome OS is separate from Android, the two will overlap in some areas. The Chrome operating system is designed to save users from having to deal with viruses and security updates, Google said.

“Google Chrome OS is being created for people who spend most of their time on the Web, and is being designed to power computers ranging from small netbooks to full-size desktop systems,” Google said. “While there are areas where Google Chrome OS and Android overlap, we believe choice will drive innovation for the benefit of everyone, including Google.”

‘Beneficial to Users’

Hewlett-Packard is studying the Chrome OS and is open to “various approaches to meet its own customer needs,” Marlene Somsak, a spokeswoman for the company, said in an e-mail. She declined to comment on whether Hewlett-Packard plans to introduce products based on the system.

Dell constantly assesses new technologies as part of its product-development process, said Anne Camden, a spokeswoman for the company.

Tony Chen, chief operating officer of Asustek’s notebook unit said by phone the company will consider “anything that’s beneficial to users.” Fujitsu Ltd. spokeswoman Nozomi Endo said the company will monitor market conditions before deciding whether to introduce products using Google’s operating system.

Spokespeople for Acer, Sony Corp., Samsung Electronics Co., NEC Corp., Panasonic Corp., and Toshiba Corp., declined to comment.

Search Rivalry

The Chrome OS -- which will run on traditional Intel Corp.- based x86 chips along with semiconductors designed by ARM Holdings Plc -- will work on lightweight netbooks along with more powerful computers, including desktop PCs, Google said.

Google’s Chrome still faces an uphill battle against Microsoft’s browser. Chrome, which was unveiled last year, had 1.2 percent market share in February, compared with 67 percent for Microsoft’s Internet Explorer, according to research firm Net Applications, which tracks Web statistics.

In May, Microsoft introduced a search engine called Bing that has enhanced shopping, travel and sorting features. Bing’s market share climbed to more than 10 percent in June, according to Comscore Inc.

Google’s search engine is No. 1 in the U.S., holding more than 60 percent market share. Microsoft is No. 3, according to ComScore.

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