Revisiting the Google vs. Microsoft Fight: Questions Answered

Rob Enderle

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.


Core Business


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.


Advertising Competence


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.

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Dec 3, 2009 2:05 PM a. asdf a. asdf  says:

Fight me like a man Enderle, heh. You do make some good counter points. Continuing my role as a devil's advocate...

--"First, I was arguing that Microsoft should have never entered this market, which competed with the PC market"

In your previous post, I thought you were complaining that Microsoft was bypassing OEM's and rolling its own products.

Anyways, its either that or letting Sony and Nintendo compete against you, and Microsoft not really able to compete back. Consoles and PC's have very different gameplays, namely consoles are able to be played on a TV out of the box.

--"Microsoft's gaming resources are largely concentrated on the Xbox and PC gaming has languished"

I think PC gaming overall has dropped at the expense of console games in general. I've seen some numbers which support this. I don't know what the before & after numbers look like for Microsoft Gaming division after the Xbox. If I had to make a guess, I would say Microsoft has overall profited from the move and diversified its product line in the process.

--". Given that gaming performance has historically driven the high end of the consumer PC market"

Does Microsoft care about the high end PC market? It just sells one OS license regardless. The PC OEM's are another story.

--"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."

Hmm, you got a point there.

Dec 3, 2009 2:21 PM Rob Enderle Rob Enderle  says: in response to a. asdf

Yes but by bypassing I meant that XBox doesn't benefit their key partners and the money people spend on the Xbox comes from a pool that includes PCs.  XBox has been operated at a huge loss up until recently but it never has approached the profit that Windows enjoys.

What initially funded the Xbox move was a fear that Sony would turn the Playstation into a set top PC, that never really happened.  The risk that justified the Xbox never really materialized. 

Ideally, for Microsoft, Sony and Nintendo would license an embedded version of Windows from Microsoft rather than compete with them.  That is Microsoft's model, by doing the Xbox this can never happen. 

The Windows gaming effort before Xbox was very robust, most of the gaming folks moved to Xbox when that group was launched.  I rarely hear about Windows gaming from Microsoft now (doesn't even feel strategic). 

The very high margin Windows Ultimate SKU was targeted at gaming, they have largely killed it with Windows 7.  But financially sound partners make for happy partners and lots of Netbook sales are making no one but consumers happy at the moment (very low margin) and making the move to something like the Chrome OS much easier. 

Dec 3, 2009 2:30 PM a. asdf a. asdf  says:

--"GM's problem was one of size, complexity and labor mismanagement."

I think GM's problem was concentrating and narrowing down its business efforts and unions. When you sell the same car under a hundred different brand names, that is not diversifying, it's the complete opposite. And when you do concentrate solely on your core business and someone like a non-union Toyota undercuts your prices with no way to fight back, it's over. And add on stuff like this ( http://wsjclassroom.com/archive/06may/auto2_jobsbank.htm ), it's hopeless from the start.

Yes, you have to watch where your bread and butter is coming from. But in the case of Microsoft and other monopolies (Google), once your product is dominant in the marketplace with no real competitors, there is a reason for it, don't try to fix it (Vista). Instead, diversify.

Dec 3, 2009 2:50 PM Rob Enderle Rob Enderle  says: in response to a. asdf

The GM vs. Toyata fight is actually a textbook case.  Toyota was building to current market needs, GM lagging the market by 5 years by the time cars hit.  One year you could look in the GM parking lot and you'd have seen mostly Toyotas (the employees didn't even buy the cars).  They had completely lost track of their market.  The Japanese moved to hybrids, GM bought Hummer.  

The easiest way to kill a monopoly (other than pissing off anti-trust folks) is to lose track of the underlying market.   Diversification results in distraction and distraction results in things like Windows Vista, Bing's gains, Toyota etc.

You can't be expert at everything and the farther you get from your core competence the more at risk you are.   You lose track of your market and what you don't know about the new one (and assume you do know) can kill you.  

Dec 3, 2009 4:26 PM a. asdf a. asdf  says: in response to Rob Enderle

--"They had completely lost track of their market.  The Japanese moved to hybrids, GM bought Hummer. "

Doesn't that prove my point exactly?

The Prius was launched in America in 2001, even earlier for the Japanese market. The Prius was a total distraction, it was a science experiment. Who was going to pay extra for a hybrid at the bottom of the price range for gasoline prices? ( http://futures.tradingcharts.com/chart/CO/M ) It was way outside their core business. There was no way to justify the cost of researching and developing a hybrid when oil was at $30 barrel. The only people who, at the time, would be crazy to enough to even suggest it, would be people like me.

The Hummer was in reaction to the consumer demands for bigger and better SUV's, also around the same time the Prius was launched. GM was concentrating on its core business and its core customer base.

Dec 3, 2009 4:55 PM Michael Jones Michael Jones  says:

A long time ago, in a land far far aw.... wait a minute, it was here.

There was a time when visionaries ruled the PC marketplace.  When they made oodles of dollars from their ideas, people began to hate them.  I've heard Bill Gates lambasted for leveraging market dominance and Steve Jobs demeaned as an excentric narcisist with little or no ability to see the outside world from inside his skull.  But what about Google?  Why is there no figurehead there for us to effectively scapegoat with the problems of the modern computing word?  Well, in part I think it's because they never made most of their money from the public diredctly.  But I digress.

Google, Apple, and Microsoft were all formed on the same idea ... to create something new and relevant that would transform the way people did things.  Anybody remember the "A PC in every house" goal.  They did something revolutionary because they themselves wanted what they were building.  It was to create something amazing that drove them, and because of their own fundamental desire to make a mark on the world around them. 

Competition kept them focused.  Google had to prove they could do it better than folks like Yahoo, Webcrawler, Alta Vista, etc... and proceeded to proove they could.  Just like the Microsoft had to beat the pants off IBM's OS/2 and Apple did with the Amiga, and Commodore (OK, they really didn't stand a chance).

But then there was the issue of funding, which is where it all went south.

See, these guys weren't really customer focused as much as they were idea focused.  But ideas dont make money, sales do, and that requires a product.  To make a product to investors, who then in turn demand repayment for their patronage.  Once their ideas alone weren't making them money they had to find ways to keep the shareholders happy.  The pressure of making money replaced the desire to create something amazing.  The vision died, and now it's all about who can be first to market, or have more profitability, or squeze the other guy out.  Neat is enough, and amazing is just too expensive.

Nobody wants to watch a Football player who has no passion for the sport.  No matter how much strategy he knows, the one who gets the camera is the guy with heart.  And he'll make money too.

So in short, I don't care if Google wants to release a game console, or Microsoft wants to sell "Ad Words" or Apple wants to release a Server (chuckle).  What I do care about is who is going to revamp the way I approach something and do something that changes the way we live or do business.  Google doesn't sell to people, but without them they make nada.  Same goes for everyone in this business.

So maybe they shouldn't compete in already explored areas, as the original article eluded to, but instead find a new market to compete in.  Some new ground to break.  Go for the big fish that's still out to sea, instead of arguing over the makerel they caught yesterday and is already rotting.

Dec 3, 2009 7:46 PM Rob Enderle Rob Enderle  says: in response to a. asdf

Since the 70s we have been predicting another oil crash and it was clear China was increasing oil consumption at an unsustainable pace.   Toyota didn't want to be caught with their pants down so they invested in a number of technologies and hybrids came the closest to being viable.  GM went public on saying Toyota was stupid.   This was a diversity issue on either side this was GM not thinking strategically and simply looking at what was currently selling and assuming the world wasn't going to change.  GM's executive management (and Chysler's and Ford's) clearly didn't want to suddenly retire either nor watch all of their stock and stock options drop to zero (except for Ford).  They just took their eyes off the ball and paid the price. 

You are correct GM was focusing like a lazer on what people were currently buying when they planned new cars (same mistake they made in the 70s).  Toyota was looking ahead and trying to build cars that people would want to buy in the future.   The future always comes. 

I would arge that GM's distractions kept them from seeing the future.   With a 3-5 year lead time required to bring a car to market it is criminal that GM lived in the present and made this same near company killing mistake twice along with Chrysler and Ford.

The market car companies have to watch is not today's market but the emerging market 3 to 5 years out because they can't respond quickly enough to deal with the present.   In short they lost track of the future and paid a heavy price in the present. 

Dec 3, 2009 7:50 PM Rob Enderle Rob Enderle  says: in response to Michael Jones

On a long time ago...   Boy I couldn't think of a way to say this better.   It does seem like folks don't really aspire do amazing things anymore doesn't it?   So much time is wasted on silly fights and egos, and hell I'm probably just as guilty of this myself, but I do wish for more magic and there are times I really miss it. 

Dec 5, 2009 3:01 PM a. asdf a. asdf  says:

Nice discussion.

Summarizing a few of my last posts, once your product reaches a certain level of maturity, you get less and less growth and return on investment for every dollar you put in. You should instead look for alternative opportunities, ideally close to your core business but not necessarily. You might achieve better results than you would have concentrating solely on your core business. Of course, when things go wrong, that concept fails spectacularly. With some research, this would make a nice topic for a book.

Dec 6, 2009 8:52 PM Rob Enderle Rob Enderle  says: in response to a. asdf

But you always have to keep in mind what you're good at.   This is what most companies miss.  They assume that just because they are good at one thing other things that seem similar, but aren't will be as easy.  This is like someone who is expert at woodworkind suddenly thinking that working with metal would be a good idea. 

For them a better path would be a different kind of woodworking like moving from building home furnishings to office furnishings or cabinets would be ok.  Google, right now, is kind of in the furnishing business but really doesn't seem to understand how furnature is used (they are in the advertising business but don't really understand advertising). 

I think they should concentrate on learning their own business, then take that competance and apply it more broadly as a more profitable path.  As long as they don't really understand the business they are in they are very exposed if someone comes up that understands it better. 

Fornutatly Microsoft, instatutionally, doesn't understand advertising/marketing any better than Googe does at the moment but they are stating to learn (largely thanks to Apple).  That could become a problem.

Agree that this might make an interesting book depending on how the topic was approached.


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