For Microsoft Google’s business is the way forward

Stan Beer
Monday, 30 July 2007 18:59

Opinion and Analysis

Microsoft's new chief software architect Ray Ozzie and his cohorts were not short of visionary statements about cloud infrastructure services and moving to a software as a service strategy when talking to financial analysts last week. However, it was left to CEO Steve Ballmer to spell out what the software company really wants - Google's business.

It's no secret that the market simply is no longer convinced that, despite a robust set of numbers this year, Microsoft can continue to grow its cash cow legacy desktop and server software businesses at a reasonable rate.

While Microsoft executives hastened to espouse the virtues of web-based software as a service (SaaS) models as the way forward, however, the fact is few companies are making a killing in this area just yet.

Even the granddaddy SaaS CRM provider with the inflated stock price Salesforce is loudly proclaiming that it is on target to achieve revenues of US$600 million this year. Meanwhile, Google has released one SaaS product after another, all of which make little or anything for the company. The thing that brings home the bacon for Microsoft's web nemesis is obvious.

The real money to be made on the web is in advertising, whether it's search results ads or context sensitive display ads on the sites of web publishers. As Steve Ballmer said in no uncertain terms, Microsoft is going to throw every spare cent of its considerable financial resources at making sure it becomes a force to be reckoned with in advertising.

So while Ray Ozzie was talking about Microsoft building new data centers to deliver web services, the real announcement of interest last week was the creation of "the Internet Services Research Center (ISRC), an applied research organization dedicated to accelerating innovations in search and ad technologies and delivering them more rapidly to advertisers and customers."

In plain English, Microsoft has started to pour bucket loads of money into developing its search and advertising business in an effort to bridge the gap with Google. Advertising wins in the past 12 months with highly trafficked sites such as Digg and Facebook, plus recent stats showing that Microsoft is improving its search market share ever so slightly, provide a glimmer of evidence that the strategy may be starting to pay off.

Satya Nadella, corporate vice president of Microsoft’s Search & Advertising Platform Group, said: “We’re committed to delivering better, faster search results for our customers and more creative, effective ways of delivering value for advertisers. We have been able to make an incredible amount of progress  in just a few years. Our investments in engineering in conjunction with ISRC, Live Labs and Microsoft Research will enable us to bring new innovations to the market in a rapid fashion.”

While Google continues to flex its muscles and grow in strength, it doesn't yet dominate the web or even the search space to the extent that Microsoft dominates the desktop. Therefore, it would be a mistake to dismiss Microsoft as an also ran in the search and ad space.

Microsoft may be running a poor third to Google and Yahoo with a paltry 10% market share right now. However, with more than $50 billion in revenue coming in each year in a virtually self-sustaining legacy desktop business, a newly focussed Microsoft can afford to chip away relentlessly at the business of Google whose sole source of revenue is advertising income.

Can Microsoft come from behind once again and grab the lead in the search advertising space? It has never had a rival as powerful or with as deep pockets as Google.

However, a sobering for the search leader is that Microsoft is already in a position to win advertising and search customers from Google on the web but Google is still not even close to shifting Microsoft customers off the desktop. It will be interesting to see how the battle unfolds over the next couple of years.