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
huge growth and outsized market cap, the most common refrain that I hear in discussions of Google is that it's in trouble because
is going after Google's business.
My answer tothat is,
and will continue to be: Flip it. Simple mathshows that Google's the hunter here, and that Microsoft, not Google, isthe company on the defensive.
To make the point, let's look at where Microsoft is going after Google and then where Googleis going after Microsoft. The numbers show that Google has far more to winin these battles, and Microsoft is shouldering far greater risks.
Gates Grapples With Google
Microsoft has spent billions of dollars developing and buying searchtechnology, 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 atabout 15%. These market-share figures have been pretty static overall,amid the sector's outsized growth, so while it's not pulling away, it'sclear Google's not backpedaling either.
How about the Internet ad business? Microsoft's spending hundreds ofmillions trying to get some meaningful momentum in that business.Meanwhile, RBC raised its estimates for Google's current quarter Tuesday -- partlybecause the Internet ad business is booming for the company. Again, thisis a great growth business for all companies involved, but Google's the800-lb gorilla. And while Microsoft's not exactly playing with a pawn-market fiddle in trying to get into second chair, they've not gotGoogle's number here.
Let's review here. Google's dominant in two hugely profitable and veryfast-growing businesses. This dominance comes in markets that arecurrently measured in the billions of dollars in total sales, which willquickly 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 stayrelevant 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 fordownload that they call the "SideBar." I downloaded it upon availabilityand noticed immediately that the company's software is now more fullyembedded in my Internet browsers and in my Microsoft Outlook than it's everbeen. Up until yesterday, anytime I mistyped a Web site's URL into myMicrosoft Explorer window, I was sent to a Microsoft page telling me thatthe URL didn't work. Now when I mistype a URL, I get a Google page. Theregoes 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 keepnotes, such as the coding for placing a hyperlink into the text in
Columnist Conversation, in my Outlook notes. So I'd have tobounce between programs in order to grab a note. Now it's right there forme. Point being, SideBar is incredibly functional in its first betaiteration.
What's to stop Google from opening up the functionality of theSideBar (or making available a similar type download or even Web-basedapplication) that allows users to type up documents, thereby taking somesmall market share from Microsoft's dominant Office program, which has morethan 90% market share.
Google's also updated its desktop search program, is
rolling outan instant messenger application and it's going to continue to moveinto Microsoft's 97% market share in that domain known as your desktop.
So Microsoft dominates slow-growth, mature, cyclical businesses, wheresuccess is driven much more by market share than by secular growth. Theseare businesses in huge markets that are already measured in the tens ofbillions 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 Internetbusinesses it dominates.
Now recall that old Google dominates businesses thatare growing quickly from a much lower level and Microsoft has tospend heavily to makeheadway 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 verystrong buy right here, based on its low valuation and the coming roll outof 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
, which is also targeting Google? Yahoo! benefitsjust as much as Google from the secular-growth areas. It's that simple.
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At time of publication, the firm in which Willard is a partner was net long Google, Microsoft and Yahoo!, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.
He also produces a premium product for TheStreet.com called
The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback --
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