Notes from the Super Heavyweight Bout

Google v. Microsoft

A few observations on the super heavyweight, no-holds-barred, ultimate cage match between Google and Microsoft.  Some of these have been rattling around in my head for a while so please excuse my inability to embrace the real-time “what are you thinking (or eating) this instant” Twitter aesthetic.

Google’s Soft Landing

Google’s Q4 and Q1 performance was brilliant.  Amidst an imploding economy, they managed to ramp revenue and cut costs.  They increased monetization (let no screen space go without an ad…), slashed capex, deferred datacenter build-outs, slowed headcount growth to almost nothing, trimmed employee perks (while repricing options) and whacked a bunch of services that were going nowhere (all but killing the 20% time myth in the process).

There was always a question about Google’s management chops and how they would perform when push came to shove.  The question appears to have been answered and the new CFO seems to be getting most of the credit.

Microsoft spent the better part of a decade on its odyssey from shrimp to weenies, slowly squeezing costs as growth slowed, and still had a lot to clean up after the dot com implosion.  Doing this kind of deceleration in less than a year is very impressive.  While the claim that search advertising is immune from macroeconomics has been put to a rest, Google will outperform amidst the ongoing (and likely protracted) “global economic crisis”.

Microsoft Windows Live MSN Kumo Yahoo Search

While Google shows it has knobs that do in fact go beyond 10, Microsoft continues to play rope-a-dope in search, with an ever diminishing quantity of rope.  (Microsoft watchers should understand that When We Were Kings is a SteveB favorite).

Despite new management at Yahoo, the company still seems infected with Paralysis Yahoois, so the inevitable combination of Microsoft and Yahoo search drags on and on.

Hopefully Microsoft has more in the cupboard here than just a new name.

Windows 7

I have only played with the public beta, but it looks very good.  It even runs nicely on my much-despised Sony laptop, which was unusable with Sony’s craplets and Vista. 

And it should be good, given three years to put Vista on a diet and add some user interface chrome (all for the better, especially fixing the wireless UI which I find to be the single most annoying aspect of Vista).  In many ways, Windows 7 is Vista Service Pack 7.  The biggest competitor for Windows is always the previous version of Windows, so the recent “Vistaster” will be a boon.

In the last month I’ve heard from people seeing more recent builds there are still a fair number of bugs to fix, but it is going out hell or high water.  Microsoft is very anxious to put Vista behind them.  Figure a street date two months after it releases to manufacturing, so it could be in stores on new PCs as soon as July.

I think the product will be an unambiguous critical success from a product perspective.  But the big question is not the product but its impact on the business.  Microsoft has a very tough pricing decision ahead of it for Windows 7 on netbooks which are the only bright spot in an otherwise dismal PC market.

A great example of unintended consequences, netbooks started out as the Taiwanese PC industry’s response to the $100 One Laptop Per Child initiative.  But instead of being sold to kids in developing markets, consumers in developed markets are buying them as cheap second or third PCs.  And all the protestations you hear that they aren’t cannibalizing more expensive PCs are a sure sign they are cannibalizing more expensive PCs.

Moore’s Law has powered the industry for decades: you get twice the processing power for the same price you paid 18 months ago.  But there is a flip side to Moore’s Law (and one Intel in particular has feared for years): you also can have the same processing power as the last generation for half the price.  This is the dynamic driving netbooks which are now 10% of the PC market and the ramp is unbelievable.  Basically 0 million units in 2007, 15 million units in 2008 and a projects 30 million units this year.

Netbooks have had a bigger impact on the Wintel business franchise than all the anti-PC children’s crusades of the last 20 years combined.  Average selling prices of PCs have dropped by about a third due to netbooks.  Both Intel and Microsoft have chosen to eat their own young rather than let someone else do it, but it has come at a cost.  Intel’s CY-Q4 revenue was down 20% and you really see it in Microsoft’s CY-Q4 and CY-Q1 results.  Windows revenue doesn’t usually decline, much less faster than PC units.  The drop in the premium mix is even more precipitous (double digit hits in both of the last two quarters).  This is an ominous sign of declining pricing power.

Microsoft got its share back in the netbook space in 2008, but did it with sub-$20 copies of Windows XP Home.  So will they price Windows 7 to keep that share or protect revenue?  Starter Edition seems to be dead on arrival (in fact, to go back to a stock soundbite, you can’t spell Starter Edition without the letters D, O and A…), but they can always keep offering the immortal Windows XP if necessary.  Home Premium will protect the revenue, but it is likely to be too expensive for $300 PCs that are on a trajectory to a $100 BOM cost and will face a bunch of even cheaper Linux and Android-based competitors this year.  So the big question is will Microsoft go for units or dollars with Windows 7?

Google and the Enterprise

Google is just not serious here.  The outages and privacy-breaching data spills don’t help.  The economic situation means they have the tailwinds behind them and the shift to the cloud in general, but they just don’t seem to be serious about this business.  Is it a cultural thing where they’re just not willing to do what it takes?  It took Microsoft over 15 years to be able to say they got the enterprise with a lot of motivating/de-motivating beatings along the way.

A possible by-product of the soft landing is that the great Google land grab may be coming to an end.  Google’s window to throw new stuff at the wall and see what sticks could be over.  My guess is we’re seeing a cultural shift that can’t be reversed.  It is tough to dream big dreams and pursue ruthless efficiency.  Google has staked out a very lucrative and high growth franchise that they can very successfully milk for the next decade, but I think we’re less likely to see radical and disruptive thinking from them in the future as they optimize what they’ve got.

Microsoft
certainly benefited from having a long time window and multiple product cycles to invest in new businesses like the enterprise and entertainment.  Google’s window may have been much shorter (and in general I believe Google has followed the Microsoft arc albeit much more compressed.  To prepare for their next act I suggest they “lawyer-up”).  They have a great franchise, but they didn’t build any new franchises during the land grab.  So they’re still fundamentally a one-trick pony.

2 thoughts on “Notes from the Super Heavyweight Bout

  1. Keenly following

    Charles,Google’s interest in disruptive solutions in energy area comes (via VC funding, policy influences, research etc) off as serious attempt in figuring out another area for revenue\profits. How do you see that?One can argue that it’s still one area that they are spending some efforts on but the number of arrows are far too many. I don’t remember microsoft going after any other big opportunity (non-IT) in that fashion. Anyway, ignoring MS\Google comparison, what do you think?

  2. Charles

    It is really tough for companies to be great at things beyond their core competence. It is even harder for very successful companies. When you have a world-class hammer, everything is a nail you’ve seen before. I’m skeptical energy is an algorithmic problem.The Microsoft examples aren’t as extreme as Google, but there are plenty of places relatively close to its franchise where Microsoft was less successful than it might have been because the Windows model seemed like a great playbook to apply to new markets (e.g. Windows Mobile and other embedded opportunities). The furthest afield Microsoft got was things like Expedia, which was reasonably successful, although you can argue that was in part survivorship bias (its peers like CarPoint, Sidewalk and such are now forgotten) and in part Microsoft setting it free. There supposedly was a revelatory meeting where Bill and Steve realized Expedia was a very different beast when the biggest strategic issue was not technology but whether the company should buy hotel rooms in bulk to resell. Soon thereafter Expedia turned in a balance sheet event.I think Google’s days of throwing things at distant walls are largely over. The alternative energy investments are a sideshow or more cynically proactive PR to mitigate their huge and growing electrical consumption (watch what happens when people in the Pacific Northwest realize their electric bills are going up because the BPA is selling so much juice to the big datacenters on the Columbia).

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