I had enough interesting questions come in on my last post on the battle between Google and Microsoft being stupid that I thought I'd do another post addressing the questions. These questions were on the strategic nature of the Xbox and Zune for Microsoft, whether the idea of a core business makes sense for a monopoly, Google's advertising focus, the need for competition, and Ann All's excellent question on whether Google needs to understand advertising if all it makes is advertising tools.
Xbox and Zune
The first question asked if Microsoft could have licensed out the Xbox because gaming exists on a subsidy model where the consoles are sold at a loss. First, I was arguing that Microsoft should have never entered this market, which competed with the PC market that was core to its business because it would never contribute the kind of profit that its highly leveraged OS market did. However, look at Nintendo, which over the last three years has been the most profitable in this segment. It sells its console for a profit and effectively created the opportunity to have a PC-like gaming console market.
Currently, Microsoft's gaming resources are largely concentrated on the Xbox and PC gaming has languished. Given that gaming performance has historically driven the high end of the consumer PC market, the opportunity cost of the Xbox is likely in the billions. I doubt anything this entire segment will ever do will make up for the profits lost from shifting buyers away from PCs. The PC OEMs feel that Microsoft doing the Xbox but not allowing Xbox games on PCs made Microsoft into a competitive threat because these OEMS were increasingly competing with Microsoft for sales dollars.
The second question was on whether you need a core business. Before Jobs took Apple over, it was a mess of products and lacked focus. He indicated that he was going to build a Sony-like company. He collapsed his business-focused efforts and eliminated the products he felt were non-strategic.
Part of this goes to why most CEOs don't do particularly well; he was reducing his company's scope so that it resided within his capability. Most CEOs drive the scope of their companies beyond where they can effectively manage -- the core of the old Peter Principle. GM's problem was one of size, complexity and labor mismanagement. Toyota was able to focus more tightly on quality and cost containment and eventually took the market away. Hyundai is even more focused than Toyota and has additional cost advantages, which is why it is growing the fastest.
If you look at the most successful vendor in any segment, as measured by growth and profitability, you will generally find that it is the most focused, the least complex, and has defined its segments. Microsoft is in the outsourced (by hardware makers) software business. Google is in the advertising management business. You can certainly have a diverse portfolio, but you should always know what you're best at and make sure no one ever takes your leadership away from you, as Apple effectively did with Sony.
By knowing its core business, Microsoft would avoid initiatives that would upset its primary customers -- the OEMs. And the CEO with the best relationship with those OEMs should be selected. For Google, advertising is its core market and the CEO should be someone with an advantage in terms of knowing this market and being able to bridge advertisers and content providers; that is closer to the core competence. Instead, Google is run by an enterprise guy who seems increasingly likely to repeat Netscape's enterprise mistake.
There were two comments about Google and advertising. The first provided two great links showcasing that Google is making strong investments in new advertising tools, first with the acquisition of Teracent and second with search formatting changes, which seem to be designed to better optimize returns on ads. Ann All's question is very interesting: Does a company that lives off advertising revenue need to be expert in advertising? Does a company that makes tennis rackets need to demonstrate an expertise in playing tennis?
What if you had a choice to buy tools from a company that demonstrated excellence in doing the task or one that did not? The reason we use spokespeople that are expert is to connect the expertise to the product, but this only plays in the face of competition. Right now, Google doesn't have that much competition on tools -- mostly it is on search. But you would expect that lack of competition will change as this market evolves. Not having an understanding for advertising might allow a competitor that did and could match Google in development capabilities to be able to steal Google's market.
There was a great comment suggesting that both firms need competition. Dominant companies often forget who their customers are and competition can serve to remind them. Had Google and Microsoft partnered rather than competed, both companies would likely be focused on other things. Google wouldn't be improving search as aggressively and Microsoft wouldn't be dropping as much money into its Internet division, and it wouldn't likely have as much focus on the cloud. Of course, this points back to the problem of focus. A properly focused company can operate without competition. It is only a company that lacks focus that needs competition to provide it with direction. Apple's greatest successes were not competition driven. I don't argue whether Microsoft or Google need competition, I argue that if both were run more effectively, they wouldn't. Keeping companies focused on customers and markets seems to be much harder in every industry than it should be.