Saturday, September 24, 2005

Will Google hurt Microsoft with free software?

Google relies on its search ad model to drive huge revenues from its widely used search engine. The same business model is used when expanding into new areas like Gmail. When you use Gmail you often get some rather relevant text ads next to your emails. Are these intrusive ads? Well it depends on who you ask. Personally I see them as relevant content, a really nice feature actually!

This business model binds everything that Google does together. So when Google is launching new products and tools, they are not just diversifying the business away from search. No, they are just creating new ways to expose their clients ads next to relevant content. The search algorithms make sure, that it is the right ads shown at the right and relevant places. This keeps clients happy, because they get relevant business leads. It keeps the users happy, because they get relevant ads instead of being exposed to boring or annoying mass communication. Some of these ads actually give you exactly what you were looking for - the way ads should work!

No doubt it is a really good business model. The same model that made Google buy, so that content like this blog, could have Google's ads next to them. The ads can vary a lot from who is looking at them. The country you are in is just one of the factors, that determine which ads you get. Google is already gunning for Microsoft. Sidebar is aiming at the desktop - Microsoft's very domain. Or so it used to be. Google is getting closer to the holy grail of Microsoft - no doubt it has Microsoft scared big time. And Microsoft should be scared. This is the first company that really has a good chance at hurting the software giant big time, and Microsoft knows it.

Without the dominance in Windows and Office and the revenues from these - Microsoft would be crippled. Its the cornerstone of the cooperation's success, and its capabilities of leaping into other product areas like mobile, online and gaming. But what happens, if Google decides to distribute free software, because they actually could make a profit from it? Surely software is extremely expensive to produce, but Google also make an extreme amount of money on their ads. If Google were to hand out free software, surely many would neglect paying Microsoft. Also if Google were to make it open source, they would actually get a lot of free help in producing this. It could even be based on Linux or some of the other alternatives to Microsoft today. Imagine the impact on Microsoft! Imagine the impact on the software industry!

Google and Microsoft are both making sure, that the software and the online industry are merging, because both are working their way into the other industry. Google is currently dominant in the online industry, Microsoft is in the software industry and has been for decades - one player will be dominant in the new merged industry in a couple of years from now. I think that free software is Google's chance of gaining leadership, it certainly would hurt Microsoft severely. Microsoft's chance is gaining leadership in search, before Google can finance free software. But with the current status of market share and product quality in search, I wouldn't be betting my money with Microsoft.


oadfji said...

What about AOL? M$ wants to buy or partner with AOL to counter the Google threat. M$ will do what it can, with a lot more cash than anyone else, to keep making more money. Yes, M$ will probably change in radical ways to stay in business. I'm trying to imagine how M$ will look after a few years. M$ is a trans-national corporation now, it can outsource to many coutries. Will all the developers in Redmond be out of work in a few years?

Anders Kargaard Jensen said...
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fCh said...
This comment has been removed by a blog administrator.
fCh said...

Anders, this is likeley to be a fight in several rounds. Google's folks have learned the Netscape lesson.

First and foremost, the analysis ought to be split in consumer and enterprise markets. Then, on the consumer space, SWOT analysis should be conducted for both contenders. They both have lots of cash and that leaves a whole field of opportunities open. Which one company is better positioned to execute? If it's about anything with scale, I'd say MSFT. Scale could come into consideration as early as step #2 or never--depending on the technology and business model.

On the other hand, how big is the advertising market and how much will it be Google's?

It's an analysis that requires much more than a blog format.

Cheers, fCh

Anders Kargaard Jensen said...

Fch, I tend agree with you. There is room for a lot more analysis on this topic. For me personally, a blog is a good way to start. It helps my own analysis, as I have to think things even more through, when I have to communicate my thoughts to others.

However, I believe that I have valuable experience from having worked at two of these companies. So a lot of analysis has allready taken place at the more informal level. I believe that there are certain key "battles" in this war. I tend to focus on these, as I believe, that the outcome here, will determine the end result.

I would actually say, that scale really isn't MSFT's force. Look how long time it takes to launch new products, and how MSFT employees on Mini-Microsoft (link to this blog on frontpage) aren't even sure of target launch dates. Also there has been substantial problems with so called "Intergrated Innovation". The MSFT organization don't really support Bill Gate's wish to innovate and integrate across the different products. There has been some successes, but not a lot.

Anonymous said...

I agree Google seems to be making the right moves and everyone else is doing catch-up. Is a merge between MS and Yahoo possible? They would have a better chance of slowing the growth of Google then by working separately. My enemy's enemy is my friend?

Anders Kargaard Jensen said...

I agree Google seems to be making the right moves and everyone else is doing catch-up. Is a merge between MS and Yahoo possible? They would have a better chance of slowing the growth of Google then by working separately. My enemy's enemy is my friend?

I don't think that a merge between MSFT and Yahoo! is likely, although you are making some very valid points! MSFT has been offering to buy Yahoo! since they were much smaller, but Yahoo! has allways been wanting to do it on their own. I guess partly because they also have the chance of beating MSFT and then partly because MSFT has become a slow growth business, while Yahoo! still is growing 57% a year on EBITDA (Earnings Before Income Tax Depreciation and Amortization). Yahoo! shareholders would loose out on this growth, if they were to become part of MSFT. So I don't think, that Yahoo! shareholders would like it - even though MSFT most likely would.

Anders Kargaard Jensen said...

Hi oadfji

Surely MSFT can buy into or all of AOL, but it won't change the fact, that people still go to Google to do their searches and to some extent Yahoo! Only a smaller percentage use MSN and AOL. And surely some of AOL's current search users will go to Google directly, if AOL replaces the superior results from Google with MSN's results.

No doubt MSFT has a large supply of cash - $40 billion I think it is. But as I know from one of my former collegues now working at Yahoo! Search, then you can't just buy your way to the best search engine. It takes skilled engineers/developers and they don't come in huge supplies. Google has the advantage here compared with Microsoft. Because those that choose to work with Google, also get options in Google. These options can become extremely valuable and make the employee economic independent. This doesn't happen at Microsoft anymore.

At MSFT you get shares instead of options. Amongst other reasons simply becuase the company isn't growing the way it used to. Surely Microsoft still grows, but the shareprice has been flat for 3 years. It has been flat for several reasons: The antitrust threat, slower growth than earlier, the threat of Linux and especially the threat from new competitors like Google, that has the capability to produce software, that threatens Microsoft's core revenue streams.

This all means, that although Microsoft has a ton of cash, they can't compete with Google's far more attractive options packages. If Microsoft wanted to compensate its programmers at the same financial level as Google, but in cash, it would severely hurt their financial statements and further send the share under pressure.

As long as Google's shares keep going up, its almost "free" for Google to compensate employees with options, since the market is paying for the show.

I think this is one of the fundamental reasons that a growth company like Google can get the better brains, and thereby possible winning the game.

I think that any possibly outsourced programmer tasks would be add ons to the current production in Redmond and wouldn't replace it.