We may never know if Google tricked Microsoft into going after Yahoo or not (it is my belief they did) but they sure love the drama. Think about it, in effect their two biggest competitors are currently focused on each other rather than on Google and this leaves Google free to move against both.
Google’s strategy long term is simple: They want to own the online advertising revenue stream (and they currently have about 70% so you could argue they are basically there today) and they want to cripple Microsoft. This second is more of a personal goal than an economic one, but the executive team sees Microsoft as an evil that needs to be stamped out and they have placed considerable resources on that single and well focused task.
Let’s take a look at what I think their strategy is.
The Magic of Google
The key to taking out a large company is to assure that company doesn’t see the killing blow coming until it is ready to be delivered. That’s tough when the company you are trying to take out is focused on you like a laser. But magicians live in a world of misdirection and in this Google is a master.
Google knows that Microsoft’s cash cows are Windows and Office. Their strategy against both is not the traditional run at doing an OS and a productivity suite. Apple for example, has tried this with little success. As good as the MacOS and iWork are, Apple really isn’t making much of a dent at all in Microsoft’s money machine.
As a magician or more accurately a pick pocket, the key to getting the wallet or watch off someone is to distract them from what you are doing. Yahoo does exactly that and has focused a massive amount of resources on closing this deal. Google doesn’t want to stop the deal they want it to consume Microsoft so that Google can slip in and turn off the lights
But the market is on the verge of moving to the cloud and the likely vehicle for that move is probably going to be more of a cell phone/appliance like device than it is a PC. So Google’s attack is on three vectors. First realize they don’t have to take Microsoft’s revenue stream they just have to deny it to Microsoft. This is like blockading a country until their resources run out.
Google’s Attack Vectors
Vector one is to take over the PC desktop value. If you have a new PC you likely have noticed that the gadgets that come on it and the primary search bar you use now come from Google and not Microsoft. And that the home page for the browser is Google’s as well. This is to take the value from the desktop and make it Google’s. If successful people will not want to upgrade their OS because their value is now attached to Google and not Microsoft and if they want at some future point, Google should be able to drop out the Microsoft OS and replace it with their own. But given the cost of Windows is carried by Microsoft while the value, as defined by user touch and advertising revenue, is increasingly Google’s they may never really have to do that.
Vector two is Google Apps. Google’s own young productivity suite, increasing penetrating education, constantly improving at a potential rate much greater (they don’t have to wait for major releases) than Microsoft Office can reasonably improve, and designed to be delivered for free it potentially erodes Microsoft support over time in both education and consumer segments. While penetration numbers remain small against the massive Microsoft base, Office 2007 is effectively stalled. Google Apps is at over 1M users and tied to a peer-to-peer advocacy model by a company that effectively controls much of the information we see. Once this product matures, it should cut into the market like a hot knife through butter. Remember, Google doesn’t have to sell anything, all they need to do is get people to lock down on Office 2003 and use Apps for the stuff 2003 isn’t that good at (like blogging). They aren’t trying to take Microsoft’s revenue they are trying cut Microsoft off from it which is an easier path.
Vector three is Android and if we accept that the next PC will be a smart phone, which for 4M iPhone users is probably currently the case, then this market is where the PC market was in the 80s; largely fragmented and dominated by a few imperfect vendors (IBM, Apple, Atari, and Commodore then, Research in Motion, Microsoft, Apple and Palm now). But, unlike the PC market where the machines were mostly not networked, this new platform is defined by the network and what resides on it. In the 80s the OS was the key, now the key is the cloud and right now Google appears to own the key and most of the cloud based revenue.
Microhoo would have Helped Google
Google couldn’t kill Microsoft without help from Microsoft but with the merger attempt they seem to be getting exactly that. Vista and Office revenue are weakening and Microsoft seemed vastly more focused on Yahoo than anything else at the moment. If Microsoft had convinced Yahoo to merge, Google would have received a lever they could use to apply substantial regulatory pressure to Microsoft in several geographies.
This would be with the hope they could continue to distract the company, better would have been a hostile takeover giving Google an opportunity for openly campaigning against Microsoft and appearing as the defender of Yahoo. The end result would have been much of the value from Yahoo that Microsoft wanted for a fraction of the price and an even bigger distraction for Microsoft while making Google’s alternatives to Microsoft’s products more politically attractive.
The low cost marketing opportunity for Google alone would be priceless but could they actually kill Microsoft? Probably not, Microsoft is too large and too diverse, but they could leave it as a shell with much of the core value of the firm stripped from it.
Key to all of this is Microsoft staying distracted long enough for Google to complete their plan. That’s why Google truly loved Microhoo and will miss it now that it is gone.
