Google's Chrome OS won't be an immediate threat to Windows, but it may force Microsoft to reinvent its operating system into a product that takes full advantage of the web and that can move more nimbly across devices, according to analysts.
Microsoft is unlikely to have been surprised by Google's announcement. From what has been revealed about the Google Chrome OS - which won't be available until the second half of next year - it aims to bring the ease of use that Google has brought to web-based applications, such as search and chat, to netbooks and eventually to full-size PCs.
A Google OS is "something Microsoft has been worried about for a long time," said Matt Rosoff, analyst with Directions on Microsoft. He called it "the first significant threat to Windows in a very long time," although he said the threat may not become fully evident for another 10 years.
Still, Google's plan to exploit the popularity of low-footprint, low-cost netbooks could accelerate the need for Microsoft to reinvent the bulky, PC-centric version of Windows for consumers and businesses, as more people begin using applications that live on the web rather than on their local hard drive.
It could also eventually force the company to develop one core version of Windows that can be used on any device - be it a smartphone, netbook or PC - similar to the way Apple moved downstream by adapting its Mac OS X software for use on the enormously successful iPhone, analysts said.
Microsoft has not been immune to the problem of marrying the increasingly web-centric world with the desktop world, in which applications run on a thick client with a resource-heavy OS, but until now the company hasn't had to worry too much about it.
With Windows the de facto standard on PCs, people have been for the most part content to wait for Microsoft to deliver new versions of the OS, and connect to the web and their favourite applications from there. And many business customers are tied to Windows by long-term contracts and application dependencies, which has kept them loyal to Windows for better or worse.
For its part, Microsoft has been working to hone its web-based services and applications, and even removed some software from the forthcoming Windows 7 - such as email and photo-editing software - in favour of web-based versions that are more lightweight. Windows 7 will be available on PCs later this year.
Microsoft also has a research project called Midori that envisages a next-generation Windows in which the OS becomes more Internet-centric and eliminates dependencies between local applications and the hardware on which they run, although the company has not said how this might fit into Windows' commercial future.
The emergence of netbooks, however, changed everything, taking not only Microsoft but also the rest of the hardware and software industries by surprise, and providing a vehicle for Google to make its move into the OS market.
"Netbooks showed up and startled everybody," says Forrester analyst Frank Gillett.
But while netbooks provide a way for Google to get a foot in the door of the personal computer market, the company certainly has aspirations to challenge Microsoft on more traditional PC form factors as well, he said.
Google's challenge and its implications usher in a new phase for the OS market in which both the hardware that the OS runs on, and the OS itself, become less important, and a device's ability to keep people connected to the Internet and their applications and data that live there becomes paramount.
"Google Chrome OS is the death knell for a PC-centric OS," Gillett said. "The next versions of Windows need to be much more Internet-centric."
Microsoft has been moving in this direction for some time but has yet to clarify its direction for how Windows, running across multiple devices, will take full advantage of the web; the company so far has revealed the strategy only in bits and pieces.
Technologies like its Windows Live applications and services - including the compelling but poorly understood Mesh technology, which keeps files on various devices updated by tying them to a "mesh" via the Internet - are part of a larger Microsoft vision for connecting people to the web through software. But the company has yet to connect the dots between those services and Windows, analysts said.
"I think they have the strategy in place, but they haven't executed on it particularly well yet," said Michael Silver, a Gartner vice president and distinguished analyst.
The company may now have to scramble to fill in the blanks. Microsoft has never been a company that likes to move quickly, and until now the PC-centric world of its user base hasn't forced it to, he said.
But things move faster on the web. When Microsoft rested on its laurels with Internet Explorer -- the de facto Web browser for many years -- Mozilla disrupted the market with innovations in its Firefox Web browser. It was only when Firefox started to threaten IE's market share that Microsoft began again to seriously update IE.
The fast pace of the web is also why Google was able to rise so fast as the dominant search player and make so much money -- cash that's now allowing it to challenge Microsoft in its own backyard.
"Microsoft knows things are moving more toward the web and fighting to stay relevant and make .NET work on multiple platforms," Silver says, speaking of its web development platform. "But certainly today their cash cows are Windows and Office, and the slower any sort of move goes, the better for them."
Google's OS challenge will certainly accelerate the move to a world where applications are no longer dependent on an operating system - and thus hasten whatever plans Microsoft has to modify Windows for this world - but "it's going to take a while before we really get there," says Silver.
Microsoft has declined to comment on Google's announcement, and it remains to be seen how it will respond. But analysts said Microsoft has a few options to maintain its dominant position in the short term while also positioning itself for the longer battle.
Right now it can shore up its relationships with hardware makers and business customers to keep people in contracts to use Windows as long as possible, analysts said.
It can also continue to develop device-centric OSes and try to make them as robust as possible, to continue its dominance in the PC arena and make deeper inroads on mobile devices - although its position in the smartphone market has been undermined by the iPhone and it is unclear how Microsoft can respond, Rosoff said. "Apple is dominating the market - Microsoft is not even considered a competitor," he said.
To tackle the longer-term threat from Google's Chrome OS, Microsoft could start with a clean slate and create the version of Windows envisaged by its Midori project, Gillett says. This might be difficult for traditional Windows users to swallow - particularly entrenched business customers who use Windows-dependent applications - but not impossible, he says.
Gillett cites Apple and its drastic "jump off the cliff" transition to Mac OS X in 2001 as a precedent for migrating users successfully from a desktop OS with which they're comfortable to something game-changing. "Apple has been very, very good at making technology migrations and forcing users against barriers," he said.
However, Microsoft faces "a much bigger challenge because of the size and the nature of the ecosystem and the fact that they don't control the hardware," Gillett says.