Supernatural Agency: Online business tales

I don’t think Google is shaking in their pants today now that the dust is settling on the Microsoft/Yahoo announcement. Only Microsoft would think that gluing together two crappy search engines would create a slick competitor to the ‘leader’ as Steven Ballmer elliptically refers to the Goog.

Microsoft has been struggling in the past five years to break out of its two product monopoly (Windows and Office), struggling with no apparent vision other than to keep pumping out unneeded upgrades of bloated desktop software. Their search division is the only part of the company that loses money and that’s because no one uses it- I’m not even sure what it’s called these days…MSLive? I’d guess their market share is almost entirely based on it being the default search tool in IE and Windows.

As for Yahoo, their search started as little more than a massive user-created directory and the problem with directories is that they must be manually maintained to stay up to date and they don’t scale. They moved to an algorithm but the move came late. The algorithm model that Google uses is constantly being fine-tuned to accomodate changes in technology, to fight abuse and, most important, to refine the relevance of the results. You cannot buy the time needed to catch up to them.

Now, $44 billion later (assuming the hostile takeover is successful) we have Microsoft attempting to swallow something bigger than its head. I don’t see any real integration potential- it is likely one engine will be killed off and the remains branded as some awful MS Live thingy. That $44 bill is a big chunk of Microsoft’s war chest and using it up brings Microsoft and Google much closer to financial parity (not to leave out Apple with its $18.5 billion cash hoard and rapidly encroaching operating system market share) because I don’t believe the combined new business will add up to anything near the sum of the parts as far as the markets are concerned- we might even see the majority of that market cap disappear.

Google, on the other hand, is criticized for making 99.9% of its revenues from search advertising. You can look at this two ways: Either they are a one trick pony in which case they are a very good one trick pony, so exceedingly good that you’d have to be crazy to challenge them, or they are simply building another business on the sidelines that hasn’t broken out yet. That business is online applications and hosted data storage. I come down on the latter POV.

I’m one of the ten people in the world who use Google Apps. I use Docs all the time now for writing because it is a nice simple editor and I can share my work with my business partner regardless of where we are or what machines we have access to. I also use Gmail and their Calendar and iGoogle. While I have no idea how Google plans to monetize their applications (advertising won’t work- Gmail generates practically no ad revenue for example), I do think that what they are doing is becoming the default location for doing business on the web. This an end-run around Microsoft’s core business. As it is these days I only use Word as a desktop backup for my Google Docs- and any text editor could serve that function.

We’re in a paradigm shift here. With broadband and rising energy costs businesses are going to be run from decentralized locations- home, satellite offices, video conference suites, etc. Online applications are perfectly suited to this model. The MS-Yahoo pairing doesn’t address this fundamental change at all.

There is a feeling of desperation in this move- when will someone realize that Ballmer is not a strategic leader?