A few days ago (April 26) Gary Hamel wrote a piece for the Wall Street Journal explaining what Google needs to do to keep growing. He said that they, like other great firms such as Dell and Microsoft in the past, need to make sure that they evolved their model - have an expansive set of purpose, flat organization, invest in what could be, and hire only the best people. Although these are vital issues, of all the things one could say about Google, they don't strike me as the most interesting. What is more interesting, I think, is the fact that Google has a business model that can monetize eyeballs and even though more people spend more time inside Microsoft's products than they do with Google; that is, Microsoft has more eyeballs than anyone (if you think of all the time the hundreds of millions of users are "inside" MSFT products, or online with MSFT), but MSFT can't monetize them in their core product. Neither Microsoft's business model, nor its distribution channel relationships, nor its technology architecture allows it to gather value from these eyeballs. They can garner this value through MSN, which is why they are pushing it so hard. On the other hand, Google, can attach its business model to any kind of eyeball traffic. As my friends John Henderson, Nalin Kulatilakak, and N. Venkatramin from Boston University say, Google is engaging in platform competition, and achieving influence over some strategic control points in this industry.
Unlike Lotus 1-2-3, and Netscape before them, it is much harder for Microsoft to bundle things that can hurt Google. They are making a very interesting move by saying that their next version of Internet Explorer (IE7) will default to MSN's search engine. Microsoft won against Lotus by many tactics, including the fact that they aggressively sold a suite of products, at a low price, and bundled their Excel product to eviscerate Lotus's core offering, the spreadsheet, 1-2-3. It is hard to remember now that at one time Lotus controlled the vast majority of PC industry software revenues and profits. Lotus, for its part, could only counter by price competition for its suite of products was similar to MSFT. When Netscape came along, Microsoft could bundle the browser with its other software, and thereby turn the industry darling into road kill, by simply putting Internet Explorer into everything, cheaply. Because MSFT had possessed the strategic control point of the PC operating system, they were able to extract tremendous value, and hurt others that tried to attack them.
However, with considerable penetration in the market of PCs, and movement to Web 2.0, in which on-demand services, and open software are more prevalent, the strategic control point is moving toward Google. Put another way, if you ask yourself the question, what can MSFT bundle to hurt Google, the answer is many things, but they must have a new way to extract value. They have to integrate search into the operating system, and into their online services -- and they have to make their online service the best and popular. It is through their online service that they can drive advertising driven revenue. If you ask yourself the question, what can Google bundle (and even give away) that can hurt MSFT, the answer is also many things. Because Google's technological and business architecture allows them to give away calendaring, word processing, and bundle any other free software, they can attack Microsoft in its core - bundled PC applications and operating systems. In the language of the economist, this is a two sided information market, where Google is subsidizing end user functionality, while extracting the economic value from advertisers. (To see more on two sided information markets, see my blog on iTunes). Google is the first time in a long time MSFT has faced someone with an new economic model - in their home turf of PC functionality.
As I have mentioned in my earlier blog about Google, their pricing mechanism creates an active market in desire, which is dynamically priced. They can grow to be a huge company for most of the $150 billion spent on advertising (in the US, 2005) and $250 billion spent on promotional activity (again, US only) are not "addressable". I expect that companies like Google can garner at least 25% of the market for demand generation for all firms want more measurability of their media spend. That means that on advertising in the US alone their relevant market is at least $100 Billion. I expect it to be much bigger.
Furthermore, as my friend Gordon Bell informs me, Google's technology architecture is massively parallel and allows them to "scale out" not "scale up". This means that they can continue to add very low cost computing and storage and provide excellent performance. They are on a completely different technology cost curve than an organization that has a scale up architecture. Gordon claims only Amazon and Google have taken advantage of scale out architectures, and therefore have a much, much better cost base for their technology.
Google's willingness to allow others to use their functionality is also vital. For example, you can sign up to use the Google Maps API, by simply having an account at Google. With this, you can use their mapping technology almost any way you see fit (except commercial uses for which you need to pay), and this is old news to those who are engaged in Web 2.0; what I think is cool is that by allowing service oriented APIs into the market, the market can tell you what features and functions are needed.
Many years ago at a DEC users' conference called DECUS, (remember Digital?) I spoke after Bill Gates. During his talk he mentioned the fact that 87% of the code in Word is not used by any given end user. They allowed feature creep to happen because they want to have everything for everybody. Well, Google's model allows the creation of everything for everybody, but the function base will eventually be customized to you - and you will not have to wade through everything to have what you need. Put another way, the functionality is (and will be) modular and you can pick and choose what you want.
What is going on here is a new architecture of competition in which the strategic control point has moved to the service provider, Google, who has the best, and most capable platform. This platform, like the Window OS before, can be built upon. According to my BU friends and their analysis' MSFT only restricted a few dozen APIs over the years, and let the others be very open. But those APIs that they did restrict, gave them strategic control over the operating system, and thereby the PC's future. Today, Google is finding the new strategic control point of search - supported by a scale out architecture, and the locus of control is the net, not the end user's box.
Will this mean the end of MSFT. No! They just had a record quarter. Also, MSFT has always found a way to find new strategic control points. I believe that their long term and large investments in MSN and XBOX are both examples of an effort to gain strategic control points.
However, for the first time in my professional career, since MSFT became dominant, I see a company (Google) that has a business model where they have a way to extract value which MSFT will have to reinvent themselves to counter (at least at the moment). Further, they can give away key applications in the core product suite of MSFT, like word processing, spreadsheets, calendaring and so on.
In short, MSFT must find a way to blunt Google's architectural control of search and the two sided information market it enables, or, for the first time, they may actually have a real competitor. Given MSFT's history, they are probably up for it, but it may be their bloodiest battle yet. The good news for both of them is there is a huge addressable market for desire to be explored and exploited.