Mister Softee Looks to Eat Google's Lunch

Microsoft's capacity to utilize resources to fight such a war almost goes without need of mention: It is, simply, Microsoft's modus operandi. Currently, Microsoft loses nearly $150 on each Xbox 360 sold, and the firm would be happy to lose hundreds of millions this way in order to pressure Sony(SNE Quote) and to get as many of the units in the hands of consumers before Playstation 3 is released in the spring of 2006 (and it intends to make some of this up through its own game sales). In addition, Web advertising garners considerably higher margins than gaming hardware, so Microsoft can almost afford to give it away in order to gain market share.

Furthermore, Microsoft's search is only a taste of what is to come. Despite Google's early lead in search and Web advertising, and despite having great engineers develop the most elegant algorithms, Internet search and "smart" ads are not rocket science. Ultimately, Microsoft and Yahoo!(YHOO Quote) will copy many features and catch up. For example, two weeks after Google launched Google Base, its new online listing service, Microsoft launched its own free online classified-ad service (Fremont). As this occurs, such features will become more and more like commodities that will be distinguished only by how they are packaged and marketed, and by the content that accompanies them. (Which brings us to the worst house in a great neighborhood and a discussion for another day: The AOL division of Time Warner(TWX Quote)

Ultimately, the evolution of product will come down to execution and timing. Can Microsoft integrate the search and portal interface into Vista well enough to be adopted by the consumer? And can the company leverage its financial war chest, its operating system dominance and its willingness to lose money long enough to deter Google's momentum?