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

Google search	Bing
Chrome browser	Internet Explorer
Chrome OS	Windows OS
Gmail	Hotmail, Live Messenger
Google Android smartphone OS	Microsoft Windows Mobile
Google Docs	Microsoft Office
Google Maps	Microsoft MapPoint
Google Health	Microsoft HealthVault
Google News	MSNBC
YouTube	Microsoft Soapbox
Google Earth	MSN Virtual Earth/Bing Maps

More: “Fighting for Health”