In Search of the Future: Google Vs. Microsoft

Since last year, the Google Phenomenon has been creeping steadily into all factions of society, from the broadsheet financial papers right down to the teenage magazine weeklies, making Larry Page and Sergey Brin household celebrities worth billions of dollars and determined to change the way everyone works, plays and interacts over the next decade. When even notoriously “anti-American corporate” French periodicals start declaring the rise of U.S. companies, you know something’s going on: only last week, Le Point featured both founders on the front cover and declared boldly inside: “L’ambition de Google parait n’avoir aucune limite” (the ambition of Google seems to recognise no boundaries).

Suddenly everyone everywhere is talking about Google teaming up with Sun Microsystems, who has come obligingly out of left wing, to possibly create the most advanced new desktop software around, making a challenge to the Windows standard. And Google is laying the groundwork with numerous Beta test applications, taking on everything from academia (Google Scholar) to e-mail (Google Mail) down to internet chat and VOIP communications (Google Talk).

But how credible are these threats? Certainly the savvy invitation-only launch of applications such as GMail and Google Talk has elicited some favourable press, and the functionality and usability of its Beta launches has been extremely well received by both the public and by technical critics, but could this innovative relative newcomer really take on Microsoft? Many seem to think so.

While there is a lot to be said for the weighing up of the technological merits of both companies' capabilities, how about looking at it from a purely financial perspective? After all, as history has continually proven, a specification war is not only won on the technilogical superiority of a comapny's product but on its muscle in the fight. What most people seem to have forgotten in the midst of the Google hyperbole are the fundamentals behind the two companies. Google has a reputation for being very secretive, something that has been, again, well received, while Microsoft’s very public announcements appear to be going in one ear and out the other of most analysts. But is Google really that secretive? The company is touted almost weekly in one broadcast or another as “changing the world” or “knowing no limits” or “never ceasing to adapt”, and one has to posit, with this much excitement in circulation, does Google really have nothing at all to do with all this?

It would be naïve to think not. Furthermore, a closer analysis of the company’s share price since the IPO last year seems to give way to more suspicions about the apparent ‘secrecy’ Google encloses around its HQ in Mountain View, California. The company is now trading at nearly four hundred dollars a share, or, in real value, at a P/E of 85! The last time this kind of valuation was seen anywhere near the NASDAQ was back in the heydays of the tech bubble. To believe that this kind of price performance in the current market climate is achievable without a heavily active PR department is somewhat risible.

The more “extrovert” Microsoft, by comparison, trades at only a fraction of this price, at a P/E ratio of just over 20. In addition to this, while Google is worth just over $100 billion dollars, Microsoft is worth $250 billion. This comparison alone makes Microsoft extremely good value and Google way overpriced by any measure, espcially with Microsoft's earnings up on the year to date.

It is easy to take cheap shots at Microsoft because of its gargantuan monopoly, and undoubtedly, it makes for great news when a young upstart takes top lead over a franchise of Microsoft’s size. But for all its evils, Microsoft has consistently delivered us into the world we now know and use: from the desktop to the application I use to write this article on, to the software that enables me to broadcast it out to a planet of six billion people, Microsoft has provided by far the bulk of the platform.

What is interesting however, despite the potential Microsoft-Google wars, is that all this publicity signals a demand from the world at large for some kind of change of the current software standardization. A lot of Microsoft’s success depends on whether its next foray into the market, Windows Vista, can provide a sufficient enough change to satisfy the demands of customers tired of filing by a limit of subject and surfing by a limit of criteria.

Because, contrary to public opinion, it looks like Google might have over-sold itself too early. A P/E ratio at its current level cannot be sustained for an indefinite period of time. The only way that Google can possibly sustain this kind of price to earnings valuation is to actually deliver a viable desktop software before Microsoft comes out with its challenge next year. If it doesn’t, and the price of its shares starts to fall (as it surely will), Google is going to find itself having to split its current stock in order to attract more investors to its equity, a strategy that could lead it to decline further. Capital withdrawal from shareholders at the moment of a head-on confrontation with a monolith such as Microsoft can be disastrous to the outcome, particularly when Microsoft is sitting pretty right now at a relatively low industry valuation. Microsoft has been a public company for long enough to know the tricks of the trade that rookie Google still has yet to acquire: Page and Brin should be careful where they tread.

Comments

[Dariana]

Hello! I just read your very impressive profile. You have a wonderful way with words, great insight, and a teriffic blog.

[Corsarius]

Wonderful insight. You should post this article in some e-zine, this would make hundreds of people think. And think hard. ;)

[Daniel M. Harrison]

Thanks to both of you: I think it's always useful to use criteria from an alternative discipline to asses the 'fullness' of the picture.

Great idea Corsarius: any suggestions (of e zines) in particular?

[fredd kambo]

Indeed,

In all the hoopla about Google and "the new frontier", many people have been tempted to see Microsoft as a has been whose time has finally come.
And yet, this same scenario played itself out exactly ten years ago with the advent of Netscape and the Internet. Let history be our guide.....
As you point out, Microsoft has the treasure chest to launch a credible fight against any competitor. It also has some of the smartest engineers and marketing people, and some of the most competitive executives in business, let alone the tech industry.
It has been widely reported that 2006 will be a bumper year for the company in terms of releases and innovation and coupled with the undeniable good value of this company, I have no problems in asserting that reports of Microsoft's death are greatly exaggerated.

[Corsarius]

I'm not really an expert, but maybe you can submit your article/s to http://ezinearticles.com. You can also try to do a quick Google search for tech e-zines. If people get to read your article, then chances are they'd click on the link of the author's byline -- bringing them to this weblog. :)

Another good avenue might be http://digg.com. I tried it once, and a decent number of readers dropped by my space.

Good luck, friend!

[Shawn T Lippert]

I love your well written article, and your views. Microsoft has been around for quite a while, and be it so Google has risen like an infant on steroids.I see Partnerships with companies looking for shelter as they collectively gather their resources. Changes are happening fast, Where will this lead us? Do we follow where the money is? or do we go with popular demand? Wherever we go with these giants, its the consumers that will have a final say in it. Sometimes it is hard to except change with our daily tasks that now include Microsoft, we usually tend to side with a company we feel comfortable with as we are with Google and Microsoft. I think they both however should stick too what they are good at. Microsoft should stick to developing new software amd Google should stick with its robust Search Engine and Advertising. As for my household and I we will continue to use them both together for the best internet experience.

[David O Booher]

I can only speak for myself. Google has become my most valuable asset computerwise and will determine the qualities of my next computer purchase. If there must be a battle between the two I would like to see google facilitate the installation and improvment of linnux.