Google Gets Ready to Rumble With Microsoft
By STEVE LOHR and MIGUEL HELFT
Published: NYT, December 16, 2007

This excerpt is longer than my usual posting but the lessons and story are profound. I work with Microsoft and am hard pressed to believe that the people from Google are smarter or more creative. I also think Microsoft’s management team is as good as any. The fundamental issue, however, is reflected in this following chart.

Microsoft’s market cap is based on the success of their past business model while Google has very few if any legacy issues. This difference permeates the story.

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Finally, I would like to wish everyone a great holiday season and Happy New Year!!

……... With its ample resources and eye for new markets, Google has begun offering online products that strike at the core of Microsoft’s financial might: popular computing tools like word processing applications and spreadsheets.

The growing confrontation between Google and Microsoft promises to be an epic business battle. It is likely to shape the prosperity and progress of both companies, and also inform how consumers and corporations work, shop, communicate and go about their digital lives. Google sees all of this happening on remote servers in faraway data centers, accessible over the Web by an array of wired and wireless devices — a setup known as cloud computing. Microsoft sees a Web future as well, but one whose center of gravity remains firmly tethered to its desktop PC software. Therein lies the conflict……..
………there was no thought of a Microsoft takedown when, earlier this year, Google introduced a package of online software offerings, called Google Apps, that includes e-mail, instant messaging, calendars, word processing and spreadsheets. They are simpler versions of the pricey programs that make up Microsoft’s lucrative Office business, and Google is offering them free to consumers….

.......“For most people,” he (Mr. Schmidt, Google’s CEO) says, “computers are complex and unreliable,” given to crashing and afflicted with viruses. If Google can deliver computing services over the Web, then “it will be a real improvement in people’s lives,” he says.

To explain, Mr. Schmidt steps up to a white board. He draws a rectangle and rattles off a list of things that can be done in the Web-based cloud, and he notes that this list is expanding as Internet connection speeds become faster and Internet software improves. In a sliver of the rectangle, about 10 percent, he marks off what can’t be done in the cloud, like high-end graphics processing. So, in Google’s thinking, will 90 percent of computing eventually reside in the cloud?
“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”

Mr. Schmidt clearly believes that the arcs of technology and history are in Google’s corner, no matter how hard he tries to avoid mooning the giant. Microsoft, of course, isn’t planning to merely stand still. It has spent billions trying to catch Google in search and Web advertising, so far without success. And the companies are also fighting it out in promising new fields as varied as Web maps, online video and cell phone software.

“The fundamental Google model is to try to change all the rules of the software world,”

says David B. Yoffie, a professor at the Harvard Business School. If Google succeeds, Mr. Yoffie says, “a lot of the value that Microsoft provides today is potentially obsolete.”

At Microsoft, Mr. Schmidt’s remarks are fighting words. Traditional software installed on personal computers is where Microsoft makes its living, and its executives see the prospect of 90 percent of computing tasks migrating to the Web-based cloud as a fantasy. (This is the big question where Google really ha nothing to lose and everything to gain while Microsoft maybe “betting the farm”)
“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,” says Jeff Raikes, president of Microsoft’s business division, which includes the Office products.

TO Mr. Raikes, the company’s third-longest-serving executive, after Mr. Gates and Mr. Ballmer, the Google challenge is an attack on Microsoft that is both misguided and arrogant. “The focus is on competitive self-interest; it’s on trying to undermine Microsoft, rather than what customers want to do,” he says. ( I am not sure about this)

Microsoft, Mr. Raikes notes, has spent years and billions of dollars in product development and customer research, studying in minute detail how individual workers and companies use software. What they want, he says, is the desktop programs and features of Microsoft Office, and the proof is in the marketplace. “I mean, we have more than 500 million people who are using Microsoft Office tools,” he says.

Indeed, Microsoft is the wealthy incumbent with a huge lead in the market for personal productivity software, with a share of more than 90 percent. But the Google challenge, industry analysts say, is not so much a head-to-head confrontation with Microsoft in its desktop stronghold as it is a long-term shift toward Web software, which operates with different principles and economics.
Analysts note that Google is a different competitor from others Microsoft has dispatched in recent years: it is bigger, faster-growing, loaded with cash and a magnet for talent. And the technology of the Google cloud opens doors. Its vast data centers are designed by Google engineers for efficiency, speed and low cost, giving the company an edge in computing firepower and allowing it to add offerings inexpensively.

“Once you have those data centers, you want to go out and develop complementary products and services,” says Hal R. Varian, a former professor at the University of California, Berkeley, who is Google’s chief economist. They can be offered free or at minimal cost to users, he says, because they bring more traffic to Google, generating more search and ad revenue.
Google, it seems, has a promising opening against Microsoft. But tilting at a giant and taking down a giant are very different things.

Microsoft, of course, isn’t standing still. Just as it squelched the first Internet challenge in the 1990s by linking Web browsing software to its mainstay products, it is now adopting a similar strategy for cloud computing by adding Internet features to its offerings. It is moving cautiously on this front, however, to avoid eroding the profitability of its desktop franchise. (This could be their undoing)

More than any other Google foray, providing Web-based software to workers for communication, collaboration and documents promises to be the acid test of how far Google can go beyond Internet search. Will two of its formulas — its distinctive, hurry-up model of building products and services, and its rapid-fire approach to recruiting and innovation — succeed in new arenas? …….
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………VELOCITY does, indeed, matter, and Google deploys it to great effect. Conventional software is typically built, tested and shipped in two- or three-year product cycles. Inside Google, Mr. Schmidt says, there are no two-year plans. Its product road maps look ahead only four or five months at most. And, Mr. Schmidt says, the only plans “anybody believes in go through the end of this quarter.” (A sustainable growth engine is all about velocity and Microsoft’s business model does not drive it like Google’s)

Google maintains that pace courtesy of the cloud. With a vast majority of its products Web-based, it doesn’t wait to ship discs or load programs onto personal computers. Inside the company, late stages of product development are sometimes punctuated by 24-to-48-hour marathon programming sessions known as “hack-a-thons.” The company sometimes invites outside engineers to these sessions to encourage independent software developers to use Google technologies as platforms for their own products………
........MR. SCHMIDT readily concedes that cloud computing won’t happen overnight. Big companies change habits slowly, as do older consumers. Clever software is needed — and under development, he says — to overcome other shortcomings like the “airplane issue,” or how users can keep working when they find themselves unable to get online.

Yet small and midsize companies, as well as universities and individuals — in other words, a majority of computer users — could shift toward Web-based cloud computing fairly quickly, Mr. Schmidt contends. Small businesses, he says, could greatly reduce their costs and technology headaches by adopting the Web offerings now available from Google and others.

“It makes no sense to run your own computers if you are a small business starting up,” he says. “You’d be crazy to buy packaged software.”
Still, in order to succeed, Google needs to win a broad array of converts, including corporations. That effort is led by Dave Girouard, the general manager of Google’s enterprise business, who joined the company in 2004, shortly after it decided to move beyond its search business and consumer focus.

Gmail, introduced just after Mr. Girouard arrived, illustrates Google’s strategic evolution as well as its increased willingness to take on Microsoft…….
According to Compete.com, a research firm, Google Docs is gaining popularity. It had 1.6 million users in November, seven times as many as a year earlier. That’s a nice lift, but the Microsoft Office suite, containing programs like Word and Excel, is nearly two decades old and runs on some 500 million PCs. The reality is that even if Mr. Schmidt and Google are right about the potential of cloud computing in the workplace, Microsoft is still seen inside most companies as the safe choice.

Another crucial battleground for both companies is the university market, where the stakes are less about making money and more about winning the loyalty of students who might become valuable customers later in life. Google and Microsoft each offer free Web-based e-mail to universities, for example…….
……To be sure, Microsoft is not ceding cloud computing to Google. It is investing heavily in huge data centers and Web software. Inside Microsoft, there are engineers and product managers who sound a lot like Googlers…….
………The challenge for Microsoft is not the ability to do much of what Google does. Instead, the company faces a business quandary. The Microsoft approach is largely to try to link the Web to its desktop business — “software plus Internet services,” in its formulation. It will embrace the Web, while striving to maintain the revenue and profits from its desktop software businesses, the corporate gold mine. That is a smart strategy for Microsoft and its shareholders for now, but it may not be sustainable.

Assuming that competition heats up, Office may continue to be an outstanding product, but Microsoft may not be able to charge as much for it — just as low-cost personal computers eventually undercut the mainframe business, and traditional publishing and media companies have grappled with Internet distribution. The traditional products remain popular, but they become much less profitable………

………..Microsoft dismisses Google’s optimism as wishful thinking. Microsoft’s competitive tracking of the corporate market, says Mr. Raikes, the leader of the Office business, finds nothing like the momentum for Google that Mr. Girouard portrays. “It is not in any way, shape or form close to what he is suggesting,” Mr. Raikes says.

COUNTLESS decisions by corporate technology managers, office workers, university students and rank-and-file computer users of all kinds will ultimately determine Google’s success. How easy and inexpensive will it be to do e-mail, word processing, spreadsheets and team projects on Web software? Will high-speed network connections soon become as ubiquitous and reliable as Google seems to assume? Will companies, universities and individuals trust Google to hold corporate and personal information safely?