When Lakshmi Mittal announced that Mittal Steel was bidding 20+B$ on Arcelor, the french financial world went berserk. For months, Arcelor's management did everything it could to fight off Mittal, including trying to merge with other European steel manufacturers. At the end of the day, though, Mittal got his lunch. And so too, in all likeliness, Yahoo! will become part of Microsoft in some way, shape or form. For, as the following postulates, this is likely not about search. Rather, this is about containing Google in order to inhibit its ability to truly establish itself into any other market than search. And, for better or worse, Microsoft's strategy will likely work.
Google, as if it needed introduction, made close to 17B$ last year, the vast majority of which came from ads. It's got a solid income, the very enviable position of being the doorway of the Internet and a tremendous amount of goodwill amongst technology enthusiasts and geeks all around. It's often cited as an example by those working with or for startups and VCs see it as the reason they should pour money into anything that can be “useful” to millions of users. It's got plenty of “cool” applications and seems to have a knack for always doing “the right thing”. In short, Google is considered one of the good guys for a lot of people in the IT world.
Microsoft, on the other hand, is reviled in the IT world. Talk to almost anyone in this industry and they'll have their own personal reason as to why Microsoft is “evil.” Even some of its customers feel this way. But for all its Darth Vador / The Borg reputation, Microsoft continues to be the standard operating environment for the vast majority of users out there. And that is a compelling position.
For, whether true or not, Microsoft's inability to truly innovate has not hampered its ability to deliver its customers with products that embody others' ideas in a form-factor that almost invariably leads to Microsoft's implementation becoming the de-facto standard. And no matter how many times visionaries cry out “foul” about Microsoft's “inferior products”, Microsoft has a persisting habit of delivering its customers with products that are “good enough” at the time they are purchased and, albeit frustratingly, continue being “good enough” with future upgrades despite previous versions of the same products having been found to be unacceptable / problematic after sufficient testing and/or use in the field. And while this state of things drives techies crazy, it remains perfectly acceptable to those that truly count for Microsoft: the decision makers.
And this is where Microsoft beats almost everybody else in the IT world. They are truly customer-driven. They don't care about ideals and they don't care about technical feats. What counts is what the customer is willing to pay for, nothing else. It's got a very diversified income stream and is present in all market segments. Because of its position, its revenues and goodwill amongst decision-makers, Microsoft is a formidable force of nature.
Fortunately for the rest of the IT world, Microsoft's lack of vision and talent provides plenty of opportunities for creating successful ventures, Google being a perfect example. Often times, however, these upstarts believe they can defy the laws of market gravity because of their initial successes. The focus for such companies should rather be on solidifying their positions in earnest in order to avoid becoming roadkill. Google in this regard does not seem to have succeeded. For, while its revenues are large and its market share of search are remarkable, it has but marginal revenues from anything else than online advertisement, despite resources being allocated to address needs in a slew of different market segments. Plus, it has failed to make tangible inroads in the enterprise presumably because of its seemingly stubborn insistence on offering almost nothing but cloud computing – which, for all the hype surrounding it, does not have that many enterprise adepts.
For all these reasons, Microsoft's latest move looks like it puts Google on the defensive. Whether or not the Yahoo! acquisition occurs on the short term or not makes no different. Microsoft has demonstrated its willingness to take the #2 spot in the online advertising business and they have in the past clearly shown their lethal ability to plan, execute and prevail. The end result of grabbing #2 is that Microsoft will in effect force Google to concentrate all its efforts in staying #1. And that is likely a problem for Google because they had plans for being more than just a search engine. Yet those plans will come under pressure as Google is forced to defend its core business, something it has not yet had to do.
In hindsight, therefore, Google's top-brass' eagerness to have the company become active in a variety of endeavors of which none are profitable on the short term, might prove to be detrimental. For, as is mentioned above, while tech companies do strive on innovation, they also need to diversify revenue and, as we stand, Microsoft's move, no matter how long it takes to materialize, might have seriously shortened Google's runway to diversification. Especially as this diversification requires Google to either find new sources of revenue or tap into existing markets where Microsoft has been and continues to be “good enough.”
A few additional comments and pointers:
In discussing “What's in store for IT and the CIO in 2008” , CIO magazine has the following to say about Google: “For all its talk, money and bluster, Google fails to win over the CIO or the enterprise. Another year goes by in which Google talks the talk but doesn't walk the walk.”
In “IE still top dog over Firefox in corporate browser kennel”, ComputerWorld describes how Firefox has yet a long way to go before competing with IE in the corporate world. This is certainly nothing good for Google, especially in light of Microsoft's known habit of leveraging its stronghold on existing platforms for launching new ones. And it definitely highlights how tough it is to fight Microsoft on its own turf. Despite the mozilla code having been open-sourced, despite Firefox being widely popular to consumers and despite Google's financial backing of the Mozilla foundation, IE is still the standard browser in the enterprise.
In “Can Microsoft and Yahoo do More than sell ads? The SMB opportunity”, ZDNet blogger Joshua Greenbaum argues that Google faces a huge challenge in a duel with a combined Microsoft/Yahoo!: “... consider the extreme strategic deficit that Google will now face in trying to combat a Yahoo-like cloud environment infused with Microsoft’s enterprise and business user software, aided and abetted by what is arguably the best SMB channel partner base in the industry.”
In “Silicon Valley after a Microsoft/Yahoo merger: a contrarian view”, Marc Andreesen argues that the merger changes nothing (or might even be beneficial) to the startup ecosystem.