May 20, 2005
Google's Competition
Posted by Gordon Smith

When my wife and I were newly married, we visited some friends who had a new baby with flaming orange hair. During the course of the conversation, I made a reference to "redheads" (entirely complimentary, I assure you), and the new mother bristled: "He is not a redhead!"

This story sprang to mind this morning when I read Eric Schmidt's response to a reporter's suggestion that Google Fusion is designed to compete with MSN and Yahoo as a web portal: "The dynamic and internal planning is not about competing with existing offerings, but trying to do something new. We won't do something that's just the same." Uh, ok. Can you run that concept by me again? Let's see -- search, news, weather, stock quotes ... hmm.

A lot is being made recently about Google's efforts to challenge Yahoo and Microsoft. The Yahoo competition makes sense, as the two companies occupy much of the same space. But I am having a hard time understanding Google's threat to Microsoft, even after reading the Fortune feature on this a couple of weeks ago.

Here is the core of the argument:

Simply put, Google has become a new kind of foe, and that's what has Gates so riled. It has combined software innovation with a brand-new Internet business model—and it wounds Gates' pride that he didn't get there first. Since Google doesn't sell its search products (it makes its money from the ads that accompany its search results), Microsoft can't muscle it out of the marketplace the way it did rivals like Netscape. But what really bothers Gates is that Google is gaining the ability to attack the very core of Microsoft's franchise—control over what users do first when they turn on their computers.

Yes, Google has gone well beyond search and has become a software company: Gmail (excellent), Picasa (nice ... very close to great), Desktop Search (horrible ... I deleted it), Blogger (not yet), Maps (outstanding), etc. But so far -- and as far as the eye can see -- Google isn't making money from licensing these products. Almost all of Google's revenues come from advertising. Here are the numbers for the most recent quarter:

                            Three Months Ended 
                                   March 31,

                                  2004        2005

                             --------- -----------
Advertising revenues:
Google web sites             $ 303,532   $ 656,997
Google Network web sites       333,752     584,115

                             --------- -----------
Total advertising revenues     637,284   1,241,112
Licensing and other revenues    14,339      15,404

                             --------- -----------
Revenues                     $ 651,623 $ 1,256,516

                             --------- -----------

Google has surprised me with the strength of its advertising revenues, but it's still just one source of revenue. Google's most recent 10-K states: "We generate revenue by delivering relevant, cost-effective online advertising." It bears repeating: Online advertising is their whole business! Even if you believe that internet advertising has "come of age," I think you will agree that this looks like a very vulnerable position. Especially when Bill Gates and Steve Ballmer are financing their assault on that revenue source with real monopoly money.

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