Plugged In

I've mulled over the topic for the past few days, and to be honest I'm still at a loss as to how Google expects to become the next big Microsoft. On one side you have a company that's credited for siphoning off ad revenue from traditional media like newspapers and magazines, and on the other you have a company that wants to become the great platform company.

The dual nature of the business is what I think most people are missing when they look at the company. A quick peek at the balance sheets and you'll find that year over year Google has increased its revenue from advertising. The great advantage of Google is that it delivers targeted, context sensitive ads and more importantly is adept at detecting fraud. All this makes Google Ads a great way to advertise for thousands of merchants.

However, Google hasn't been content to stick to its bread and butter business. Instead the company has focused on a number of innovative data driven applications and services. It's true that apps like Google Earth, Gmail, and Google Maps have been the coolest web thing in some time, but how will they help Google make money? The answer is simple according to some, it's simply another way for Google to further Google Ads, and thus grow its revenue stream.

I admit, programs like Google Desktop are intended to bring ads from the web to the PC, but should Microsoft feel so threatened by Google? Some in the industry claim that Google will someday offer the next generation of operating system, one which loads directly from your Internet connection. But currently there are no such operating systems, and furthermore there is no indication that the next generation of OS will even go this direction.

In reality the threat that Microsoft fears is one that Google should quickly take notice of. Concerns of privacy and security have quickly come to the forefront as Microsoft's aging Windows architecture continues to suffer breaches and cracks. In spite of Window's faults, consumers have been reluctant to change to more secure operating systems. However, as time progresses the public's sentiment has changed and more people are switching to more security conscious solutions. So why does Google need to fear this? Because any system as pervasive as Google's, which scours user's systems, inboxes, and the like for information is a rich target, one which ill-meaning cretins will strive to crack.

Microsoft haters like to think that Google is the next great behemoth that will dispatch with Microsoft, but in reality it is Google that should fear Microsoft. Like many great companies before it, Microsoft is adept at absorbing technologies it does not create. In this way they are sort of bandwagon jumpers, however their value-add is that they make the technology easier to use. Even if they compromise the original integrity of the product, or introduce security flaws, Microsoft many times can come out ahead in the end. Just think back to the company's adoption of XML, instant messaging and the GUI. None of them are original, but Microsoft made them their own none the less.

On the flip side, Google is a company dependant upon constant innovation. At the moment they are stuck in "the next big hit " cycle, whereby the company announces something new every few months. It costs them millions in R&D, but it helps keep their stock price pumped up. Never mind that the last few string of duds has some pondering whether the company has lost direction. As long as they have ad revenue to fall back on, the company can stay in the green.

But given all this, is a $400 per share stock price justified? A quick look and you'll realize that the company would need to turn a massive profit, and grow earnings for years in order to recoup the investment. But apparently folks don't care, and the irrational exuberance of the 90s has returned in small part to help some look past the obvious warning signs and place blind faith in a company that has no real strategy for combating the 800 lbs Gorilla.

In the end I believe Google will need to move beyond its ad revenue stream if it wishes to continue its spectacular growth. Likewise, it will need this massive war chest of capital if it plans to offer anything that could remotely challenge Microsoft's market dominance. Of course, such a plan would put you in direct conflict with the beast and could further draw its ire. But at this point it's safe to say that if Microsoft can take out Google, it's already gunning for them. It's a safe wager to say that Microsoft will most likely triumph, either by acquiring the company or running it into the ground. This is after all Bill Gate's Microsoft, and we all know that Steve Ballmer has buried 'em before.