Monday, July 19, 2010

The Numbers Game: Looking at the Google/Apple/Microsoft Wars from the Bottom Line

You can look at the competition between Google, Apple and Microsoft for content technology supremacy from any number of angles these days, but let's try the bottom line on for size first and see where it leads the story. While I am a little ahead of earnings announcements from Apple and Microsoft this week, it's likely from what analysts are saying that Apple will please investors on overall revenues - perhaps even surpassing Microsoft this quarter, if not next - but deliver disappointing profit margins. That would seem to be in line with Apple's strong push to buy market share for its new iPhone 4 and iPad devices at any cost, a cost that apparently includes taking huge risks on apparently known service issues with iPhone 4 and known limitations on content delivery on iPad. Apple is not alone in worrying some investors, though, as Google's earnings also feature strong revenue gains and year-on-year earnings growth, but not such strong growth as to please some financial analysts.

On the surface you might say that these three companies are neck-and-neck in a fight to the death for electronic content supremacy. But looking at this from more than a quarterly earnings perspective, I do think that the real long-term victors in this story are going to be Google and Microsoft, with Apple playing an important role but increasingly becoming locked in to character traits that shift from being virtues to defects. By contrast, Google's virtues are just beginning to come to fruition, while Microsoft may yet manage to pull off an IBM-like transformation of crumbling old business models that help it to retain enterprise market revenues while rethinking its consumer platforms.

Of all three of these, Google has the strongest overall prospects. With more than USD 30 billion in cash on hand, wise strategic investments in global markets and forward-thinking platforms, Google just keeps expanding its potential revenue base with little to lose. One of the key reasons that Apple has tripped as of late is that it was keen to rush its hottest mobile products to market ahead of competitive devices coming out that are equipped with Google's Android operating system. Being first certainly does count in marketing, especially when you have a journalist-charmer like Steve Jobs able to whip up media coverage to a fine froth as a virtual science. But in the process of doing so, Apple left many key opportunities on the sidelines. By insisting on a proprietary approach to product hardware and operating system development and tight control over who may market via its App Store, Apple was able to charm relatively affluent technophiles in the U.S. and other developed nations. However, this came at the expense of rapid penetration of both developed and developing nations such as India and China through less expensive devices and more flexible partnering relationships.

Put simply, Apple has insanely beautiful products but an "old school" marketing strategy that carries with it inherent limitations on its margin and growth potential that Google lacks. Perfect control over a product can get you only so far in a world in which open partnerships are setting the pace for product and market development. An interesting contrast can be found in Google's newly announced App Inventor for Android.  App Inventor promises to make the development of applications for mobile platforms about as easy as it is to write a post for a blog. Hmm, millions of people around the world developing apps that suit their personal needs versus some thousands of software developers popping out apps that are mostly reskinned versions of Web pages or ebooks that have to pass through Apple's skinny mother-may-I filter. Guess who's about to win the apps war. Add in search, ads and Google's upgrades to its own app store for premium software due later this year and it's a foregone conclusion that Apple's key potential revenue advantage in mobile is about to start dissipating.

Google also has potentially strong trump cards against Microsoft's key strengths, but in spite of its ongoing identity crisis Microsoft has a lot stronger overall market position at the moment than Apple from which to launch a comeback. Microsoft's key strengths are a very successful launch of Windows 7, an operating system that puts the nightmare of its Vista operating system in the rear view mirror, and continued reliance on Microsoft system and office automation software in enterprises. While its Bing search engine is still a relatively minor contributor to earnings, it is an investment in future growth that is likely to pay off as Microsoft finds a widening array of partners looking for an alternative to Google as a search partner that will be respected toe-to-toe by search-savvy Web audiences. This is likely to help contribute to revenue diversification via ads and partnerships. All of these are likely to help Microsoft fuel a shift to more enterprise revenues via Web-based information services and a revamped mobile strategy that eliminates platform clutter and leverages Bing's strengths.

At the end of the day, though, it will be Google leading in many if not most key categories for market share and global growth over the next few years. Premium apps? Search will be essential to find them as thousands of them turn into millions and billions. Throw in Google's support for any Web-based application in its apps search strategy, including Google own forthcoming games platform, and findable software and rich content is going mostly Google's way. In a couple of months, Google TV will usher in an era in which we will use search to integrate the Web, TV and our mobile devices as never before - again a key opportunity for ads, as well as for premium content revenues. Mobile devices? Android has just started to hit the market in significant ways in the past six months; a year from now Android will be nearing Apple for mobile unit dominance. Tablet players from Google, HP and Microsoft will further diminish the unique advantage that Apple enjoyed as a first-mover into this segment, especially as more people opt for platforms that allow more easy content portability.

Microsoft will continue to lead in office automation and systems, but as new platforms such as Google Wave and maturing platforms such as Google Apps for Domains gain momentum, it will become harder for Microsoft to claim significant advantages in Web-based enterprise services. Devices using Google's upcoming Chrome OS browser-based operating system may also challenge Microsoft in enterprise markets where most work is done in Web-based services. There is enough cash from existing product lines to fuel more competitive enterprise offerings from Microsoft, and more likelihood that investors will nudge Steve Ballmer off to the sidelines to enable a new generation of Microsoft engineers and managers to take the lead. There is plenty of good thinking at Microsoft that is just looking for the right leadership to get it pushed up the priority chain into the right product and services offerings. Its main trailing indicator for growth will be the lack of a growing content monetization strategy. Bing will carry Microsoft in this direction only so far. With Yahoo cutting off its flank for the moment in destination content, Microsoft will need to pull off some small miracles in social media development or acquisition to get its ad revenues rolling more robustly.

So there you have it. One company hands out rubber bands for a major product "fix," another withdraws a "social media mobile phone" that may not have cracked even a few hundred units in sales, while Google just hums along with supposedly drab operating systems, search products, videos, ad networks and programming tools that most media outlets ignore, don't understand or love to hate - none of which stops Google from growing. Love it or hate it, we're entering the Google decade for many of our most fundamental content technology platforms. The good news is that this will also be the Web decade as a result, empowering intelligent content and services providers to pursue their own rapid growth strategies that benefit from Google's strengths. May you enjoy the opening bell of the markets for years to come.
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