Clash of the Titans

Seattle's Fremont neighborhood, with its 18-foot-high bridge troll and seven-ton sculpture of Lenin, has billed itself as the Center of the Known Universe. Yet this funky nexus of vegetarian restaurants and yoga studios has emerged as a focal point in a fierce battle for dominance of a broad range of critical technologies.

Google, the Master of the Internet, has a block-long, three-story building here, just a Frisbee toss from the blue and orange Fremont Bridge. Mountain View, Calif.-based Google Inc. also has facilities in Kirkland and downtown Seattle, where thousands of Googlers develop and promote a wide range of products, many of them aimed at the heart of Microsoft's most profitable franchises such as Windows, Office, Windows Mobile and Exchange. 

It's a raging struggle for global technology superiority with billions of dollars at stake. The battle, whose intensity has been heightened by the personal animosity Google CEO Eric Schmidt feels toward Microsoft, has generated a lot of heat, including rival efforts to acquire strategic targets such as Yahoo, legal jockeying and more than a little sniping. This conflict may also be the source of accelerated investments that have resulted in significant innovation benefiting consumers across the planet. 

The battle escalated dramatically last summer when Google announced it was developing the Chrome operating system, a potential competitor to Microsoft Windows. Microsoft punched back quickly, saying that its next version of Office (Office 10) would include free, online versions-a direct shot at Google's web-based office suite, Google Docs. Then, Microsoft unveiled its new search engine-Bing-and secured a partnership deal with Yahoo. This arrangement could double Microsoft's market share by putting the Bing search engine on Yahoo's popular sites.

The clash has been classically described as one between the cool, edgy Google that wants everything open and free (like Fremont) and the old, established monopolist. But the contest is more complex. Google is now an 800-pound gorilla in its own right, viewed skeptically by many consumers as well as government regulators.

Google is Microsoft 20 years ago, says Rob Helm, analyst at Kirkland-based Directions on Microsoft.

"Google is riding a wave of new technology that threatens Microsoft's core business, the same way that Microsoft rode a new technology-the PC-over the top of IBM," he explains. 

Microsoft is no sleeping giant. It is moving aggressively to defend its turf. Microsoft's only way out, says Helm, is to  outperform, outsmart and "out-Google Google."

That's a tall order. And Wall Street, for one, is putting its money on Google. While Microsoft is worth about $270 billion and its after-tax profits in the year ending June 30 were $14.6 billion, the company's stock price has barely budged all decade. Meanwhile, Google, a much younger company, earned one-third Microsoft's profits with less than a quarter of its 90,000 employees, but is worth about $190 billion, just 25 percent less than Microsoft.

Indisputably, Google represents a huge threat to Microsoft. In its web-centered computing model, applications reside in the cloud, not on the PC. That displaces and dethrones clunky operating systems and chunky desktop software bundles.

Google is presenting the same challenge to Microsoft that Netscape once did in the browser wars of the 1990s. There is only one big difference. Netscape and Microsoft fought a pitched battle to win market share with free products that don't generate any significant revenue. Netscape's Navigator browser eventually lost the battle to Internet Explorer. This time, however, Google's search engine is a hugely profitable cash machine that can finance a prolonged battle.

After years of taking pathetic potshots at Google, Microsoft has finally come out swinging. Its string of lackluster operating systems (Windows XP being the exception) has been replaced by a new version, Windows 7, that is winning strong reviews. Microsoft has also recently released or will soon release new versions of Office, Windows Mobile, server software and Azure, its cloud-computing platform. The competition with Google has accelerated Microsoft's push of some applications to the web. For example, Microsoft Office SharePoint Server, the company's online content management and collaboration tool for businesses, has found renewed success in the business software realm.

"Everything that competes directly with Google has gotten better," says Helm.

Mary Jo Foley, who edits ZDNet's All About Microsoft blog, thinks much of the battle is just so much kabuki drama. "Google has kicked and continues to kick Microsoft's butt in search and online advertising," says Foley, but she plays down the significance of Gmail and Google Docs. 

Says Foley, who wrote Microsoft 2.0: How Microsoft Plans to Stay Relevant in the Post-Gates Era, "Microsoft execs-especially [CEO Steve] Ballmer-are over-obsessed with Google." Although many customers would like to see strong competition to Windows and desktop applications, Foley says, "Google isn't providing it." But many savvy companies and organizations are dropping Microsoft Exchange and Office in favor of Gmail and Google Docs. That includes the city of Los Angeles, which recently signed an exclusive deal to use Gmail and Google Docs in lieu of Exchange and Office for its 34,000 employees. "Microsoft Exchange and Office are expensive," says the CEO of a Microsoft subcontractor, who asked to remain anonymous.

And the threat posed by Google may be helping Microsoft mobilize its forces. "It's just the way Microsoft operates," says Foley. "Their highly attuned sense of paranoia is what fuels many there."

This rivalry may be a little more intense than Microsoft's other battles not just because the stakes are bigger, but also because of the personalities involved.

Google CEO Eric Schmidt, the seasoned executive recruited in 2001 to manage the company for founders Larry Page and Sergey Brin, has war wounds and more than a few grudges from his many battles with Microsoft over the years. Schmidt helped develop the Java programming language as chief technology officer at Sun Microsystems, a system that once seemed in a position to marginalize Microsoft but instead was subsumed into the Microsoft environment. He spoke out against Microsoft back in the early 1990s when Sun complained to federal regulators that Microsoft put "hidden APIs"-virtual secret back doors-into its Windows software that favored Microsoft applications. That charge was an early precursor to Microsoft's damaging feud with antitrust enforcers.

Sun forged tight alliances with Netscape, AOL and other tech firms that battled Microsoft in the dot-com era. Then Schmidt left Sun in 1997 to become CEO of Novell, a network operating systems and applications company that competed directly against Microsoft in the business market-and lost. 

Mark Anderson, publisher of the technology industry newsletter Strategic News Service, believes the CEOs of both tech titans focus on the other too much.

"Google is essentially being run by Eric [Schmidt] as an anti-Microsoft company," Anderson says. "It's bad for Google to do that. But guess what Steve [Ballmer] is doing? He has Google disease. He's so focused killing Google, he's not managing his own company properly."

The toxic relationship harms both, Anderson thinks. "It's nice to have competition but this is distracting management on both teams."

Google issued a statement to Seattle Business saying the company "has many competitors" and takes "them all seriously." Microsoft representatives declined to comment for this story. But Ballmer has taken every opportunity to disparage Google, calling its applications "cute" and slamming Google's decision to have separate operating systems for mobile phones and computers.  "I don't know if they can't make up their mind or what the problem is over there," Ballmer said at a conference, "but the last time I checked, you don't need two client operating systems."

Customers, shareholders, and the general public can't miss the verbal enmity. But unlike ancient battles that ravaged villages and left people dead, this clash may provide an important benefit to the broader tech community.

That open competition actually benefits consumers, says Ric Merrifield, a Microsoft strategist and author of Rethink: A Business Manifesto for Cutting Costs and Boosting Innovation.

It's good for business to have a "fairly public fight," he says. "The customer is hearing and seeing it" and can assess the match and determine what is relevant.

Better products are coming out from both giants. The competition forced Microsoft to amp up its game, says Robert Fortner, a former Microsoft employee who blogs at Crosscut.com.

"The more intense the competition-the more potentially fatal-the better," Fortner says, adding a famous quote from Samuel Johnson: "When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully."

Microsoft's recently released Windows 7 is the first Windows operating system to get positive reviews in many years. Meanwhile, Google has reportedly picked up on some of the more popular features of Bing, Microsoft's search offering.

Back in August, Google leased billboards in four major American cities with ads targeting Microsoft's Office suite. Google's street ad campaign launched soon after Microsoft announced the partnership deal that will have Microsoft's Bing search engine powering Yahoo's sites.

Bing-an update to Microsoft Live Search-rolled out in June with bright lights, hoopla and hope. It has since garnered high marks but remains far behind the market leader.

That Google faces a well-funded competitor kick-starts creativity in the market, says Aaron Finn, CEO of AdReady, a Seattle-based technology company that specializes in banner and display ads. One behemoth company controlling a market doesn't encourage innovation, he says. A stronger Microsoft search offering could result in lower advertising prices. Microsoft's cash-back program, for example, aims to win market share and shave Google's margins by returning more of the high margin e-commerce profits to consumers.

Meanwhile, Google and Microsoft's epic rivalry might be distilled with a single question, according to Directions on Microsoft's Helm. "Can Microsoft get hold of Google advertisers before Google gets hold of Microsoft's business customers?"

The query echoes from Wall Street to an avant-garde neighborhood with a bridge troll and a statue of Lenin, and it keeps the two companies in fighting stance on opposite shores of Lake Washington. 

Google vs. Microsoft

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