Google and Microsoft

April 16, 2012

A couple of days ago, some investment fund manager was asked on Bloomberg about Google’s results and its competition. He replied that Google’s main competition is Microsoft’s Bing and Yahoo. This is quite false, in my opinion. Google’s income stream as well as its business model is advertising – not creating search engines just for the fun of it! Today, Google has the lion’s share of the on-line advertising market; Bing and Yahoo don’t even register. Indeed, I would contend that Google’s main competitor is Facebook. This is because Facebook essentially uses its knowledge of its large membership base to target relevant advertising. The main difference is that with Google you do not have to log in as you type your search criteria whereas with Facebook, you need to log in and update various attributes about yourself; hence, the latter relies on push technology and the former on pull technology. On another front, Google’s competitor is Microsoft. The reason being that Microsoft creates and markets operating systems (let’s call them computing platforms) that work on servers and workstations. Further, Microsoft would like to scale this business to mobile platforms such as tablets and mobile phones because that is where the future is. Google, after Apple, is the main provider of a mobile computing platform in the form of its Android operating system. This competes directly with Microsoft’s Windows 8 for mobile devices. So, to sum up, Google’s main competitors are Facebook and Microsoft.

Quite co-incidentally, Microsoft has a small shareholding in Facebook. This leaves Microsoft with some interesting options: a) take over Facebook, b) create a platform similar to Facebook’s and compete with Facebook, or c) sell Bing to Facebook.

The second option would require Microsoft investing in social media at a time when it needs to concentrate on integrating its Windows offerings to work seamlessly across all platforms: from servers to mobile devices.

The first option would be very expensive and contentious prior to Facebook’s IPO. This is because Facebook is touted to go on market with a capitalization of $100 billion whilst having an income of $1 billion. This gives it a pre-IPO P/E ratio of 100 whilst Microsoft is currently trading at a P/E of 11.15. (Remember also that Microsoft is a real business, not just a web-site!) So once the social media bubble bursts and Facebook trades at a reasonable price, Microsoft could act. But that could be four to five years from now. In the meantime, Microsoft could explore option c by selling its Bing search engine to Facebook. That way, Microsoft can concentrate on its core business model and give Google a reason to remain diverted by Facebook. Microsoft’s stake in Facebook will, of course, give it useful intelligence of the social media domain and give it a better opportunity to takeover Facebook down the road should Facebook prove to be profitable in a sustainable manner.

In turn, Google would do well to develop Android and integrate a small footprint version of its search engine with Android so that it can make every mobile device a fast, responsive platform for Google that is tailored to the user’s needs. The search engine, in essence, becomes commoditised and deployed across all those Android platforms. Add to that various social media features that allow users to meet, make choices, tag likes and dislikes, etc. That will take on Facebook’s value proposition as well as Microsoft’s mobile strategy in one swoop. Each mobile device then becomes an outlet for Google’s advertising revenue stream by effectively being a fusion of a Facebook-type social platform, a search engine and a mobile operating system. Only after Facebook and Microsoft have been addressed, should Google set its sights on Apple lest it become distracted on too many fronts.

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