Will Google be the death of Microsoft? Hard to imagine

Lots of ink these days about how Microsoft wants to eat Google for breakfast and is instead choked on the search giant. Our sister site Google Subnet has even gone so far as to wonder whether Google is Microsoft's white whale and will actually be the death of the largest software maker in the world. While anything is possible, it is hubris on Google's part to think that Microsoft will be catastrophically wounded by chasing a search business. Look at the numbers. True, Google is a strong company with a great balance sheet but it is dwarfed by Microsoft in this regard. Google ended fiscal 2007 with about $16.6 billion in revenues and $5.1 billion in net income from operations (an astounding 31% of revenue converted to profit). That is nothing to sneeze at especially when you consider the company's amazing five-year growth rate. It ended 2002 at about a half billion in revenue. Plus Google is sitting on over $14 billion in cash.

Microsoft, however ended its 2008 fiscal year at $60 billion in revenue and $22.5 billion in net income from operations (in which it converted revenues to profits at an over 35% rate -- even more astounding than Google given Microsoft's size and age). It is sitting on $23.6 billion in cash and equivalents. Relatively speaking, its $1.2 billion in losses in its online search business is a joke -- as its $22.5 billion in operating income takes into account those losses. While it is true that its losses in the online search category have doubled, it also is true that some of that money is the millions that Microsoft is investing into data centers to handle its planned surge into cloud services. For a comparison as to who is the 800-pound gorilla in the room, look at the chart below.

To give this even more perspective, Microsoft has played this game many times before -- taking a relatively small, calculated multi-year loss to build its business. The most recent example was Xbox. As an article in Forbes pointed out: Over the five years prior to 2008, the company invested (and lost) over $5 billion in XBox -- and then it turned profitable at the tune of $1 billion in profits over a six-month period.

If you are looking at the situation objectively, you would be hard pressed to make the argument that Microsoft is hurting its investors or customers with its pursuit of search. While Google may always be the king of display ads, Microsoft isn't just trying to bully its way into that market (though it would like to). There are entirely undeveloped areas of search that Microsoft is pursing such as topic-specific search (healthcare), location-aware search (mobile devices) and so on.

More importantly, however, is that Microsoft has the means to be a pain/drain to Google, which is really its ultimate goal. Microsoft is not threatened by search -- Microsoft is threatened by the fact that the browser and cloud computing could eventually make the operating system a commodity item. Developers are increasingly designing apps for the cloud, accessible to any computer via any browser (which, if you remember, was what Sun had envisioned more than a decade ago with Java as its attempt to kill Microsoft). Microsoft needs to be a significant player in that game and needs to distract Google by attacking Google where it hurts: search. Microsoft's failed bid for Yahoo makes it a failure on that count so far. But to the extent that Google must spend its resources to defend its main cash cow from a patient competitor with deep pockets, Microsoft wins. The ploy hasn't seemed to work much yet -- but to count the software giant out at this stage would be to ignore both its history and its stature.

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