May 13th, 2008
Microsoft vs. Google: Are all monopolies created equal?
Are Microsoft and Google really locked into a zero-sum game, where every gain in Google’s search business translates into an automatic kick-in-the-pants for Microsoft?
That seems to be the premise, to a degree, of a couple of new items — one on the Financial Times and the other on Silicon Alley Insider. Silicon Alley pundit Henry Blodget’s conclusion: If Google continues growing its online search business at its current pace, it could surpass the size of Microsoft’s Windows business, in terms of revenues and possibly profits, as early as 2009. And that spells big trouble for Microsoft.
Blodget blogged:
“Google’s search business will pass Microsoft’s Windows business by early next year (at the latest). Good thing Microsoft has another huge, wildly profitable monopoly: Office. Add that to the calculation, and Microsoft can breathe easy for a few more years.”
Underlying Blodget’s argument seems to be the contention that a monopoly — whether “natural” or one dominated by a company found guilty of illegally abusing its monopoly power — is a monopoly. And in a monopolist vs. monopolist contest, there can only be one winner.
There are a couple of problems with Blodget’s reasoning. I noticed some of the same ones as did posters to his site. Poster “MattyDread”:
“(Y)ou’re oversimplifying Microsoft’s business composition. The ‘Windows monopoly+Office monopoly=Microsoft’ story was absolutely true 10 years ago, but less so now.
1. It looks as if the “Office” revenue figures are coming from MSFT’s reported revenues in the Business segment. That’s not all Office. Based on what they’ve said at the last few Financial Analyst Meetings, Exchange is approaching $2B/year, SharePoint is about $1B/year, and Dynamics (formerly Microsoft Business Solutions) is more than $1B per year. I also know that Project has been a $1B/year business for a long time (believe it or not), and products such as Comms Server and Visio contribute around $500m/year. Margins on all these products are lower than on Office, but most (not Comms Server) are profitable.
2. In addition to all the non-Office products that compose its Business segment as mentioned above, the Server and Tools business (Windows Server, SQL Server) is profitable (30% margins) and growing revenues average of 15% for the last six years. Not monopoly, but a good business.”
Poster Mark Trefgarne also questioned the premise of Blodget’s win-lose equation:
“This ridiculous ‘if Google is winning, then we must be losing’ attitude is very dangerous for Microsoft. Just because Google is successful at search advertising does not mean that Microsoft is any going to be any worse off as a software company. The world still needs software and operating systems and that isn’t changing because someone else has found an equally lucrative market in a relatively unrelated area. Ballmer is dropping the ball on a huge, reliable and GROWING business, to chase after the shiny toy that another kid in the playground has. I just hope they realize this and get back to focussing on their core competencies.”
I asked a couple of other pundits to weigh in on Blodget’s premise.
“It’s silly to suggest it’s all some kind of zero-sum game, or to imply that Microsoft (unlike, e.g., Google…) is totally dependent on the financial vitality of a single product line,” said Peter O’Kelly, a researcher with the Burton Group.
Michael Cherry, an analyst with Directions on Microsoft, had some interesting observations, as well:
“Microsoft makes a lot of money licensing operating systems. Google makes no money licensing operating systems and has not yet eliminated the need for an OS. Additionally, Google has not yet made the decision as to which OS a customer chooses irrelevant (that is the applications that the user wants to run are probably still running locally as opposed to running as a service, therefore the choice of applications still drives the decision as to which OS to use, although certainly price is a factor too).So Microsoft will likely continue to make money licensing operating systems for some time.
“Google makes a lot of money selling advertising. Microsoft makes considerably less money in advertising. I don’t know how customers decide how much money to spend on advertising or where to spend it. It would seem that there is a pool of money to be spent on advertising and a number of places to spend that money: TV, Radio, Magazine and Newspaper ads, direct mail, etc. Google’s taking of the lion’s share of advertising dollars would appear to be a bigger threat to old media (TV, Papers, Magazines) than Microsoft.
I am not an economist, but it seems to me that a the dollars spent on these items come from different places; that is the customer doesn’t think I have x dollars, do I buy an ad from Google or software from Microsoft? Instead they budget money for both, and then they spend it where it makes sense (ads from Google or software from Microsoft).”
While it’s true that being able to capitalize on a monopoly can provide a company with a dependable revenue/profit stream from which to draw when attempting to kick-start other businesses, monopolies are not interchangeable. While the Windows monopoly is a lot older (and more established) than the Google one — and, because of that fact, closer to its potential end-of-life — it strikes me as also being harder to unseat. I don’t say this because I think the Windows monopoly is good for customers; I don’t.
But I do think Windows, both existing releases and new ones, are going to be on IT buyers’ shopping lists a lot longer than many Wall Street analysts, industry watchers and Web 2.0 advocates seem to believe.
Will Windows/Office or online search provide a deeper well from which Microsoft and Google, respectively, will be able to draw in the next year? Next few years?
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