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Google vs Microsoft: Now We're Getting Serious

I've heard all sorts of chatter about the Google foray into spreadsheets, and none of it resonates with me. Here are 3 key aspects of this worth thinking about:

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1. Strategically, Google is shooting at half of the Microsoft franchise

Microsoft, despite alot of hoopla you have heard about all its other product offerings, makes the vast lion's share of its money via its Operating System and via Office. Nothing else it does is generates nearly the profitable cash flow as those two money printing presses do.

Think long term strategy: From a military perspective, Google is opening a second front in the war Microsoft launched against them. You want to come after our core busines? Allow us to return the favor.

Google doesn't have to kill Office -- they only have to siphon off a small percentage of purchases to hurt Mister Softee's bottom line. Remember, once software development costs are paid for, the marginal cost of each subsequent sale is almost zero; its 99% profit. If Google captures 1% of potential office sales, that's a lot of cash -- pure profit -- off of the bottom line to Redmond.

That's right, Google is aiming at Microsoft's P/E.

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2. Time is on Google's -- Not Microsoft's -- side

After IBM's anti-Trust action, they were hamstrung. That's in large part why the PC revolution was fomented elsehwere -- Apple, Microsoft, and Intel, and not at IBM, who no longer even makes PCs.

Because of their overly aggresive anti-competitive behavior in the 1990s, Mister Softee is in a similar position. Their core business is the PC Operating system, followed by its Office suite. With more and more of computing moving to the web, Redmond loses its leverage, its monopoly advantage.

Cheap PC horsepower, lots of connectivity and increasing broadband has unleashed tons of entrepreneurial energy and creativity. The future is decentralizing. It will come from millions of new start ups, not stodgy old Microsoft. Look at all the fresh apps for GoogleMaps. Google was smart to create the online version, and then let everyone else develop for it. They tapped into the entreprenuerial zeitgeist. Compare that with the strategy of Microsoft with its Xbox.

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3. A free version of a web based Office will only benefit Dell and HP

A few weeks ago, I got a snail mail offer from Dell for a pretty fast 2.4Ghz machine -- 17" CRT included -- for the "low low price" of $300. I was about to buy (yet another) machine for the office -- when it dawned on me that Office Professional-Small Business cost $320 -- more than the PC itself. I decided to pass. (I could have gotten Office Basic -- Word, Excel and Outlook -- for $70). I suspect this process occurs lots of times in small businesses in America.

In Google's short history, they have continuously rolled out more and more offerings. I suspect that 5 years from now, we will look back to discover that a full featured Office equivalent has developed.

In the alternative, is there anyway this ends up helping Microsoft?  I can't think of any.

Last, consider this, from John at GMSV:

"It's high time, isn't it, that Google cops to having designs on Microsoft's software business. The company now offers an e-mail program with built in IM and upwards of 2.5 gigabytes of storage space, an HTML editor and a calendar program. It's developing a universally accessible network drive and likely a Web-based word processor as well.  And now it's got a spreadsheet program to boot. And it insists it has no plans whatsoever to compete with Microsoft's core PC software business? Please.

Indeed.

And people wonder why Microsoft's stock price has done nothing for 5 years . . .

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UPDATE: June 7, 2006 1:34pm

Blog Roll -- Google vs. Microsoft

This got picked up by the WSJ, which also referenced Henry Blodget and GMSV's takes on the subject . . .

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UPDATE: June 14, 2006 6:54am

The NYTimes reports on the new Googleplex in Oregon:

Local residents are at once enthusiastic and puzzled about their affluent but secretive new neighbor, a successor to the aluminum manufacturers that once came seeking the cheap power that flows from the dams holding back the powerful Columbia. The project has created hundreds of construction jobs, caused local real estate prices to jump 40 percent and is expected to create 60 to 200 permanent jobs in a town of 12,000 people when the center opens later this year...

The rate at which the Google computing system has grown is as remarkable as its size. In March 2001, when the company was serving about 70 million Web pages daily, it had 8,000 computers, according to a Microsoft researcher granted anonymity to talk about a detailed tour he was given at one of Google's Silicon Valley computing centers. By 2003 the number had grown to 100,000.

Today even the closest Google watchers have lost precise count of how big the system is. The best guess is that Google now has more than 450,000 servers spread over at least 25 locations around the world. The company has major operations in Ireland, and a big computing center has recently been completed in Atlanta. Connecting these centers is a high-capacity fiber optic network that the company has assembled over the last few years.

Google has found that for search engines, every millisecond longer it takes to give users their results leads to lower satisfaction. So the speed of light ends up being a constraint, and the company wants to put significant processing power close to all of its users.

Microsoft's Internet computing effort is currently based on 200,000 servers, and the company expects that number to grow to 800,000 by 2011 under its most aggressive forecast, according to a company document."

Hiding in Plain Sight, Google Seeks an Expansion of Power
JOHN MARKOFF and SAUL HANSELL
NYTimes, June 14, 2006
http://www.nytimes.com/2006/06/14/technology/14search.html

Wednesday, June 07, 2006 | 06:58 AM | Permalink | Comments (51) | TrackBack (3)
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Comments

I just don't understand how they can get as much for Office as the whole machine. that has held me back as well from buying a new machine.

Posted by: me | Jun 7, 2006 8:11:01 AM

You think MSFT's stock has gone nowhere for 5 years because of Google? Are you insane?

BR: No, I think the stock has gone now where for 5 years because they are a dinosaur who's fastest growth is behind them, ans who's stock isn't cheap enough (yet) to be a true value play.

Posted by: tt | Jun 7, 2006 8:17:09 AM

Yet another product from Google that doesn't improve its search engine, which like MSFT's operating system is where the cash lies. One of these days, someone is going to come out with a better search engine and Google is going to be fried. Google's core technology is stagnant, and all they're doing is buying other companies to add little bells and whistles to an existing design. That's taken as a bad sign for any other company except Google.

Posted by: royce | Jun 7, 2006 8:36:19 AM

Boy O Boy O Boy - Even Barry has turned bullish on Google. Being that my portfolio consists mostly of deeply out-of-the money puts on Google, this is certainly food for thought.

Barry - please be wrong on this one :-)

Posted by: Nomen Nescio | Jun 7, 2006 8:36:42 AM

Barry usually comes off as well seasoned until he talks about MSFT. His hatred of the company is so strong he just throws his objectivity out the window and it becomes an emotional thing.

Posted by: tina | Jun 7, 2006 8:42:31 AM

PUUHLEASE!

Now, I love Google search but let's be real. They haven't done shit beyond develop search. The Microsoft Excel users, I mean serious users, will scoff at this silliness. You aren't going to slap a ten layer, 500 line interactive spread sheet into Google's product. This is the same old Star Office bullsh*t Sun tried to jam down people's throat with about zero penetration. In fact, if one watched the press releases with Sun half a year or year ago you know this is Star Office modified.

Those who aren't serious Office users, well, they couldn't use a spreadsheet to save their life anyway. So, who's gonna buy this? I'll tell you who, the same people who bought Star Office. That would be NO ONE.

Google has this aura around it that is almost laughable. The two playboys who created this company are to be applauded and even worshiped by us mortals for living the American dream. But, they are far from immortal. Yet, people some how think these guys are some type of business genius for creating some very slick technology. Uh...ok. I have the confidence they can grow into that capability but today? No way. To the contrary, if you look back at the history, they had no idea what they created or how to monetize it. Great business vision there. In fact, they offered to sell it numerous times before Yahoo offered to buy it. And, the back up plan was to sell it to Doubleclick I believe for some paltry sum of $100 millionish. Where'd I get this info? A Barry Diller interview? Who's Barry Diller? Likely one of the top 5 media, content and entertainment minds of the last forty years. Oh, and the CEO of Ask.com amongst other things. (Btw, a search engine that was recommended by the Wall Street Journal for their recent enhancements.) So, would you rather have Barry Diller, a content and media visionary and business genius extraordinaire running the ship or Larry and Sergy the two lab rats?

So, what does all of this mean? Uh, Google's forays beyond search have typically sucked at best. They've proven no business acumen beyond monetizing search and this is hocus pocus. Search ten years from now will be so different than today that there are high odds the innovations to monetize it won't land between their walls and the most attention this product will draw is the pre-announce.

That doesn't mean I think Microsoft is any better. They aren't. But, long term, if they can unlock their intellectual property, dump that Nazi-yes-man-culture-Bal"less"mer create an environment of rewarded risk and get some sense of urgency back, I'd much rather own Mister Softy. But right now I wouldn't touch either with a ten foot pole. Because, if the consumer quits spending who's gonna buy those ads? Small business focused on the consumer? Big business "playing" with online advertising with no formally developed ROI in most instances. Uh? Yea.

Posted by: B | Jun 7, 2006 8:56:35 AM

MSFT's done zip ... so has INTC , CSCO , AMAT , LLTC , BRCM , etc...... and the NAZZ is still 60% off its highs .... these companies P/E's have imploded from 70-80-90/E or more to 15/-20/E.... MULTIPLE CONTRACTION has been the biggest culprit --- and rightly so .... for all its faults , delays , etc. , MSFT has lost no market share in OS

Posted by: jj2 | Jun 7, 2006 9:07:47 AM

barry, your conclusions seem to be drawn from stock movement..Big mistake.
Google is getting into dead zone. Slowly but surely. Vista will be a huge problema para google. Google finance/chat suck. Google blogs are often taken down. Besides, google search, as much as it is still relatively good, often does a poor service. It is based on how often sites are visited. A cute concept but a brilliant and abstract treatise on a library shelf would never be found this way.
Besides, MS office is the BEST product out there. For that you gotta salute MS. And you know how hard it is to make people shift from one sostware to another ..

Posted by: andiron | Jun 7, 2006 9:11:33 AM

Review what Barry said. He isn't bullish on GOOG, he's saying GOOG could easily start trimming off a few percentage of Office users, which hurts MSFT.

IOW, Cody might be wrong on MSFT.

Posted by: MAS | Jun 7, 2006 9:14:42 AM

"Google's forays beyond search have typically sucked at best."

So the reviews on gmail and Picassa are wrong?

I agree google sucks and after China and turnig over searches to tghe government I use them as little as possible.

I also think mr softie sucks, but to Barry's point, why should office cost more the the damn PC? Its like buying $1200 tires for a $800 car.

Posted by: me | Jun 7, 2006 9:16:56 AM

1) I keep saying the same thing about Google as i do Apple -- I love the company, but I think the stock is too risky.

2) If someone comes along and builds a significantly better user experience for Search, than Google would be in trouble.

3) All Google needs to do is skim some buyers away from Office and it hurts MSFT.

4) Microsoft put lots and lots of cash in my pocket -- so I have no animosity towards them at all -- but I still think their products stink.

Posted by: Barry Ritholtz | Jun 7, 2006 9:49:13 AM

Barry:

Stick to Macro. There are 100 other people out there blathering on about MSFT/YHOO/GOOG.

Follow the law of comparitive advantage. You are a surgeon who should be cutting flesh, not typing in the back office.

Posted by: Andrew Schmitt | Jun 7, 2006 9:57:58 AM

There's been a certain amount of sneering at the google product because it has less functionality on many dimensions than does the MS product. The work of Clayton Christensen on the history of disruptive innovation, across several industries, would suggest that MS better not breathe too easy; interesting thoughts here.

Posted by: david foster | Jun 7, 2006 10:11:57 AM

B -

Google has a decent search engine (I'm a software guy, and I can tell you that Google does a better job of indexing msft's site than msft does) but they also have world-class operations.

In addition to their search technology, they also produced a lot of custom technology to bind all that commodity hardware and open source software together.

Their internal IT processes are world-class. You make no mention of Google's operations in your discussion, but 'zero' is probably not an accurate valuation of their internal IP.

On another note; I use OpenOffice to produce many documents; I don't see it as an inferior product, especially if all you produce are garden-variety docs, which IME is what the majority of people use it for.

Posted by: eightnine2718281828mu5 | Jun 7, 2006 10:12:51 AM

M$FT threats that should but don't matter:

http://www.openoffice.org/
Massachusetts Open Document Format
Vista Delay v3.1
Adobe threatened antitrust suit
Symantec trade secrets suit
A fundamentally insecure OS by design
OS X
Wholesale third world piracy

M$FT advantages that shouldn't but do matter:
inertia
size

What happened to IBM with hardware is ripe to happen to Microsoft in software.

Posted by: Robert Cote | Jun 7, 2006 10:19:32 AM

Picasa is really not that innovative, it's basically a Windows clone of iPhoto.

Posted by: fiat lux | Jun 7, 2006 10:37:16 AM

I have to freshen up something I wrote about EMC 5 years ago, and apply it towards Apple and Google: Love the company, hate the stock

Posted by: Barry Ritholtz | Jun 7, 2006 10:53:46 AM

A clarification. My comments are not a reflection of Barry's post. So, I'm not busting him. I don't know if he likes Google as an investment or not. I'm simply stating my perspective on Google. Great search product. Interesting future investment. Still way too much enthusiasm.

Posted by: B | Jun 7, 2006 11:19:32 AM

www.clusty.com is my favorite new search engine.

check it out. results are often cleaner than google and less advertising. If I can't find what I want on Clusty then I'll use Google as a backstop but that is a rare occurance ( and typically when I'm doing an image search as opposed to a web search).

GOOG pissed me off with the China thing. I also think they are extremely wasteful with shareholder money... Honestly, I don't see where they have a competitive advantage outside of brandname recognition anymore.

just my oppinion.

Posted by: emd | Jun 7, 2006 11:25:42 AM

me: For a similar reason why if not one, then a few CDs cost more than a CD player. A computer is no more than a "player" for software.

Posted by: cm | Jun 7, 2006 11:41:35 AM

MIT's $100 laptop + WiMAX + Google = Developing country computing?

/still won't buy their stock!

Posted by: Frank Rizzo | Jun 7, 2006 12:01:26 PM

Office is here to stay. The value of the training and support is many many times the cost of the software. Very difficult to overcome that

Posted by: Bob A | Jun 7, 2006 12:35:10 PM

I slightly different take on this by Nicholas Carr
http://www.roughtype.com/archives/2006/06/googles_office.php

I agree with eithtnine .. OpenOffice works for me.

Microsoft is of the mindset it has to compete with its previous product which gets itself more and more into bloatware. Gives an opening for smaller lightweight competing products ...

Posted by: mrmanny | Jun 7, 2006 12:46:35 PM

I've actually worked for a company that tried to make the switch to Open Office. Eventually, the MS Office licenses made their way back onto everyone's desktops.

The "pain in the butt" factor of not using MS Office is just too high.

Posted by: fiat lux | Jun 7, 2006 1:47:46 PM

Two things to add to this discussion:
1. I think the biggest competitive advantage Google is sporting right now is their human capital. Most of my closest friends are programmers who have told me that the best of the best are dying to get jobs at Google. They have the best minds and the best programmers fighting for jobs there. Sure, their products outside of search may not be the best, but give it time.

2. Along the lines of giving it time, lets not forget how horrible the first few iterations of MS Office were. It wasn't until Office 2000 that I could use any part it without wanting to claw my eyes out. Most of Google's products (spreadsheet included) have just launched. We've got to give them time to work out some of the bugs and add functionality. Comparing a product that has been in development and use for 15-20 years to a product that just launched doesn't accomplish much.

Posted by: Kevin | Jun 7, 2006 2:32:49 PM

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