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Google ( GOOG) has performed a number of unprecedented feats. For example, in its brief life, it has become the 20th largest market capitalized of any company in the U.S. Equally astonishing is that its cash flow in the latest quarter exceeded $4 million per employee.

From my perch, however, this prosperity will not last.

No doubt, Google will have another monster quarter -- perhaps two or three -- but the troops forming phalanxes in Redmond, Wash., aka Microsoft ( MSFT), will provide the first real challenge to Google.

In October 2006, Microsoft will release Vista (formerly Longhorn). Similar to the recent Xbox 360 release, the release will occur at the front edge of the 2006 Christmas season. This long-awaited operating system will be included in the millions of new (and ever cheaper) computers sold during the holidays. Vista will integrate the new Microsoft search, which includes a desktop search incorporated directly into the system. This is critical: It's similar to how Microsoft integrated the MS Explorer Web browser directly into the Windows operating system as a hyperaggressive competitive move against Netscape in the previous decade.

Critics have historically derided Bill Gates and company for not being innovators. "They stole the Mac operating system and have been stealing ever since" is the claim always made. This is true enough, but misses the point badly: Being the second mover has indeed been advantageous to Microsoft. As they say, the "pioneer always gets arrows in the back."

The check-raise can be a powerful strategy for the poker player with a strong hand who is competing against an aggressive player. Microsoft has been observing, waiting and copying an emerging technology, and this can be a powerful competitive strategy.

This is especially true when you have deep pockets and a diversified revenue base (unlike Google, which is vulnerable because it reaps the vast majority of its revenue from one source). Microsoft also has deep-rooted expertise in fighting a war of attrition.

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) 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) 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)

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?

Since Google's initial public offering a bit more than a year ago, investors have perceived the company's growth as open-ended, and its shares have more than quadrupled. Google shares are now a must own for growth-oriented investors.

Despite today's ringing endorsements by investors and analysts (who are notoriously prone to extrapolate and overestimate future growth), Microsoft, Yahoo! and Google will eventually look a lot like the the three major television networks before the introduction of cable.

I started this opening missive with the notion that Google likely has several outstanding quarters in front of it. But there is no doubt, in this observer's mind, that Microsoft's troops (which are currently forming phalanxes in Redmond) are a competitive threat that will affect Google's growth rate adversely in the years to come.
Doug Kass is general partner for two investment partnerships, Seabreeze Partners L.P. and Seabreeze Partners Short L.P. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box." Kass aappreciates your feedback; click here to send him an email.