A measure of how seriously Microsoft takes
the challenge came Thursday when it announced that its
spending would rise sharply next year, about $2 billion
higher than previous estimates. Much of the extra money,
analysts say, is going to meet the threat from companies
offering advertising-supported Internet services and
software, led by Google.
"Microsoft doesn't have to kill Google, but it has to narrow
the gap," said Richard Sherlund, an analyst at Goldman
Sachs. "It has to be in the same ZIP code."
To succeed, Microsoft has to make strong inroads into
Internet services and software, where Google is a leader.
"It's clear that if we fail to do so, our business as we
know it is at risk," Ray Ozzie, a chief technical officer,
warned in an e-mail memo to Microsoft employees last year.
Microsoft enters that battle from a stronghold: its
lucrative, powerful business in personal computer software.
Google has asserted that Microsoft's next Web browser
typically steers users to Microsoft's search service,
limiting consumer choice and potentially hurting Google, the
leading Internet search engine.
Microsoft says Google's objections are mistaken, and that
its new browser, Internet Explorer 7, increases a user's
search options.
But Google has advantages of its own, and the Internet
services business is very different from the desktop
software industry.
The Internet model is one that offers search, e-mail,
calendar, contacts and even word processing as services
accessible remotely with a PC or handheld device with a Web
browser. Typically, Google invents a new service or feature,
makes it a free Web-based service, and only later figures
out how to make money on it from advertising of some kind.
That ad-supported software, distributed as a Web service, is
a threat to Microsoft's model of selling licensed desktop
software, at least in the consumer market. Corporations have
so far shown less interest in ad-supported software as an
Internet service.
To smaller software companies, Google's strategy appears to
have the same competitive impact as Microsoft's
tried-and-true practice of bundling more software programs
and features into its Windows operating system.
Danny Sullivan, editor of Search Engine Watch, a Web
newsletter, said that in some niches of the software
business, Google is casting the same sort of shadow over
Silicon Valley that Microsoft once did.
"You've got people who don't even feel they can launch a
product for fear that Google will get in," Sullivan said.
Google, he said, has acquired companies and then made their
products free, roiling the markets in which they compete.
Google has introduced free versions of the graphics software
made by SketchUp and of the Internet analytics service from
Urchin, two companies that it bought.
And Google won a bid to offer wireless Internet service in
San Francisco at no charge, hoping to make money by selling
local advertising. If this model proves to be successful, it
could cut into the business of other Internet providers and
wireless phone companies.
Now Google is starting to move directly into Microsoft's
core market. It recently acquired Writely, a Web-based word
processor.
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