Google Puts Microsoft on Its Heels

Cody Willard

This column was originally published on RealMoney on Aug. 24 at 9:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

With all the hullabaloo about Google's(GOOG Quote) huge growth and outsized market cap, the most common refrain that I hear in discussions of Google is that it's in trouble because Microsoft(MSFT Quote) is going after Google's business.

My answer to that is, has been and will continue to be: Flip it. Simple math shows that Google's the hunter here, and that Microsoft, not Google, is the company on the defensive.

To make the point, let's look at where Microsoft is going after Google and then where Google is going after Microsoft. The numbers show that Google has far more to win in these battles, and Microsoft is shouldering far greater risks.

Gates Grapples With Google

Microsoft has spent billions of dollars developing and buying search technology, which is Google's core business. And after all those billions of dollars spent on search technologies, Google's still the dominant search engine, holding 37% market share in July, according to Comscore Networks. MSN stands at about 15%. These market-share figures have been pretty static overall, amid the sector's outsized growth, so while it's not pulling away, it's clear Google's not backpedaling either.

How about the Internet ad business? Microsoft's spending hundreds of millions trying to get some meaningful momentum in that business. Meanwhile, RBC raised its estimates for Google's current quarter Tuesday -- partly because the Internet ad business is booming for the company. Again, this is a great growth business for all companies involved, but Google's the 800-lb gorilla. And while Microsoft's not exactly playing with a pawn-market fiddle in trying to get into second chair, they've not got Google's number here.

Let's review here. Google's dominant in two hugely profitable and very fast-growing businesses. This dominance comes in markets that are currently measured in the billions of dollars in total sales, which will quickly become double-digit billion-dollar markets and perhaps even into hundreds of billions of dollars in another decade or so. Microsoft, meanwhile, is doing its best to stay relevant in these markets and hoping (praying) for market-share wins.

Google Targets Goliath

So how about where Google's going after the Softee?

You might have noticed that Google rolled out a new application for download that they call the "SideBar." I downloaded it upon availability and noticed immediately that the company's software is now more fully embedded in my Internet browsers and in my Microsoft Outlook than it's ever been. Up until yesterday, anytime I mistyped a Web site's URL into my Microsoft Explorer window, I was sent to a Microsoft page telling me that the URL didn't work. Now when I mistype a URL, I get a Google page. There goes one of Microsoft's sources for driving traffic to its sites.

And then there's the scratch pad function in Google SideBar. I used to keep notes, such as the coding for placing a hyperlink into the text in RealMoney.com's Columnist Conversation, in my Outlook notes. So I'd have to bounce between programs in order to grab a note. Now it's right there for me. Point being, SideBar is incredibly functional in its first beta iteration.

What's to stop Google from opening up the functionality of the SideBar (or making available a similar type download or even Web-based application) that allows users to type up documents, thereby taking some small market share from Microsoft's dominant Office program, which has more than 90% market share.

Google's also updated its desktop search program, is rolling out an instant messenger application and it's going to continue to move into Microsoft's 97% market share in that domain known as your desktop.

So Microsoft dominates slow-growth, mature, cyclical businesses, where success is driven much more by market share than by secular growth. These are businesses in huge markets that are already measured in the tens of billions of dollars in sales per year. Google's going to take market share in Microsoft's slow-growth businesses, there's no doubt about that, while it enjoys the secular growth of the Internet businesses it dominates.

Now recall that old Google dominates businesses that are growing quickly from a much lower level and Microsoft has to spend heavily to make headway in Google's secular-growth businesses, while fending off market-share losses in its cyclical growth operations.

I sure wouldn't bet against Microsoft, and in fact, I think it's a very strong buy right here, based on its low valuation and the coming roll out of Xbox360 and Vista operating systems. But let's be clear about it -- it's not Google that is on the defensive. It's Microsoft.

Why don't I include Yahoo!(YHOO Quote), which is also targeting Google? Yahoo! benefits just as much as Google from the secular-growth areas. It's that simple.

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