Google is well known as a one-trick pony.
Almost all of the company's revenue comes from its search engine, which last quarter accounted for more than $5 billion. New initiatives, such as the Chrome browser, Google Gears, and Google Friend Connect, are focused on building a mostly open-source Internet operating system out of Google technology in order to funnel more user data and targeted advertising opportunities into the Googleplex financial engine.
It's easy to draw parallels to Microsoft, which gradually built the dominant 20th century operating system and applications platform. Bill Gates and company realized that attracting developers to the Windows platform was key. Google is following that advice with its open-source projects and allowing its mad scientists to try to remake the early 21st century software world and take on Microsoft.
Microsoft has led the way with productivity software, gaining a more than 90 percent share of market with Microsoft Office. Google is hoping to replicate Microsoft's office suite success with Google Apps. It's far less feature-rich than Microsoft Office, but Google Apps Premier edition is far cheaper at $50 per user per year.
For some companies, Google Apps is "good enough," and its cloud-based, collaborative core is an advantage--no Microsoft SharePoint server required. Even with a few enterprise wins, Google Apps is a puny business. According to a Fortune article, Google brought in about $4 million with its Google Apps business in 2007, compared with $12.2 billion for Microsoft Office. Google Apps is a profitable business, according to Matthew Glotzbach, enterprise product management director at Google.
Since early this year Google has been touting 500,000 active business customers, primarily small businesses, using at least one of the Google Apps, and more than 10 million active users. In addition, thousands of universities, with more than one million active users, are using Google Apps, the company said. So far, Google's biggest wins are Valeo, a leading automotive suppliers, with 32,000 users, and the District of Columbia, with 38,000 employees.
However, the vast majority of Google Apps users are not paying customers. The company maintains that "hundreds of thousands" of users are paying the $50 annual fee. The $50 per-user-per-year Premier Edition offers several features lacking in the free Standard Edition, including Postini messaging security, APIs for integrating Google Apps with IT infrastructure, 24x7 support, 99.9 percent uptime guarantee for e-mail, Google Video and 25GB of storage per account.
At this point, Google is underplaying the number of Google Apps business customers. The company has been saying that it is adding 3,000 businesses a day, which amounts to over 1 million per year. The reality today is that Google has more than a million Apps business customers. In addition, the Apps suite continues to fill out, most recently with Google Video.
It took Microsoft years to build a base of applications and developer ecosystem for Windows and Office. Google faces the same uphill climb for Apps and its fledgling Web operating system. The company hopes to ride on the backs of the younger generation that has grown up on the Web and identify with the Google brand. As the Google generation moves into positions of purchase authority within businesses, Google is betting that those decision makers will shun Microsoft, especially as Apps product features improve. Of course, the resilient and relentless Microsoft will respond to Google's challenge when it is more than a $4 million or even $20 million blip.
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the legal tussle between Apple and the Mac cloner, Psystar.
This week, Psystar sued Apple on antitrust grounds. Psystar execs said they just want to make the Mac OS "more accessible" by offering it on cheaper hardware than what Apple provides. It's hard not to imagine Apple fighting this one to the bitter end and Psystar getting crushed in a lengthy litigation.
Another battle is brewing with Cisco Systems adding e-mail and calendaring to its on-demand, collaborative software platform with the acquisition of PostPath. This might speed up Microsoft's delivery of an on-demand software suite. If Cisco wants to push its suite further, Zoho would be an acquisition target.
Larry and I also discuss the coverage of the Democratic National Convention. And I share my thoughts on Dell's cloud computing efforts, which means selling bare-bones servers optimized for cost, operational efficiency, and energy conservation.
On Tuesday's edition of Daily Debrief, our Microsoft-Yahoo watcher Dawn Kawamoto talks with me about what has happened since Yahoo's well-documented August 1 shareholder meeting. Yahoo's stock price is nearing a 52-week low this week, but the herd of press and analysts covering the company are either on summer vacation or allowing Jerry Yang and his somewhat new board of directors a respite from their attention. Like other public companies, Yahoo lives by the financial quarter, so the watchers will be hovering as the quarter ends in September, speculating on how Yang and company perform now that the boardroom melodrama has abated.
Sridhar Vembu
(Credit: Zoho)
Vembu's analysis is based on a comparison of revenue per employee and profit per employee metrics. "The gap in revenue per employee between Google and SAP and Salesforce.com, for instance, indicates that Google would more likely be more interested in what eBay does or in monetizing YouTube than in Zoho or Salesforce.com's barely profitable business. Companies invest in what generates the best return on investment," Vembu explained to me.
(Credit:
Zoho)
In an e-mail explaining his financial analysis, Vembu wrote:
We simply don't believe Google has the rational business incentive to go deep into the business/IT software category. The lower revenue and profit per employee figures would be tolerable if there were huge growth opportunities there; but when very successful companies like Adobe and Intuit pull in revenues well shy of a Yahoo, when even the enterprise software leader SAP is the same size of Google (Google makes more in profit per employee than SAP makes in revenue per employee), it is fairly clear this market is not going to make a material contribution to Google's growth and profitability objectives. So what is Google's plan here? It is fairly obvious they are in it to put Microsoft on the defensive on its home turf, so that Microsoft's offensive capability in the internet is diminished. It is also perfectly clear why Microsoft wants to be an Internet player--as Google has shown, it is a higher margin business even than its monopoly-profit core business.
"Google's margins are a once in a lifetime occurrence, and Google will move in that high-growth direction--that's why Microsoft is so desperate about search. It has a higher growth rate. We are more worried about Microsoft than Google. Microsoft will address the Internet, but pulling down Office margins is a challenge for them. No company peacefully accepts a lowering of margins," Vembu said. "Our intention is to help erode Microsoft's profit margin, coming in from below." Zoho has built a more comprehensive suite of cloud-based apps than Google or Microsoft, and most of them are currently free to users.
Vembu cites the cost of sales and support as a drag on revenue per employee and profit per employee. "If salesforce is a proxy, it would be difficult for Google to justify the investment. More costs are associated with support than in R&D, even with on-demand software. The moment you have paying customers, the expectations are different, and Google is finding that out with recent Gmail problems," Vembu said. In addition, he noted that selling into small- and medium-size businesses is difficult, but the margin is higher than for large enterprise accounts. Adobe Systems and Intuit, for example, have more revenue per employee than Oracle or SAP.
Zoho's revenue per employee is mostly nonexistent given most of the Zoho suite is currently free and not-ad supported. Vembu estimates Zoho's revenue per employee will be in the $200,000 to $250,000 range when the revenue spigot is fully turned on at some undetermined point.
While Zoho behaves like a scrappy start-up, it is well-funded by India-based parent company AdventNet, which develops enterprise IT management software. AdventNet has 900 employees and is profitable, according to Vembu. "One of the privileges we enjoy as a private company is to not disclose revenue/profit numbers, which lets us do the kind of analysis on competitors they can't do on us," he joked.
The problem with Vembu's logic is that Google has an enormous pool of cash to invest in improving the economics of business and consumer productivity software suites. And, part of being a software company is having multiple and adjacent revenue and user data streams. Microsoft is a highly profitable software company with many adjacent divisions. Google Apps won't be as profitable as search, but it will be profitable and ties users into the Google platform and monetization engine.
If Google can attract consumers with its apps, gaining entry into small- and medium-size business won't be a huge profit-sucking sinkhole of sales and marketing. The search giant claims that more than 500,000 businesses and schools have signed up for the free and $50 per-user-per-year Google Apps. According to Dave Girouard, head of Google's enterprise division, the Google suite has about 10 million active users. Google can afford to invest in building the the market for Google Apps, and Microsoft will be forced to alter the economics of its Office business as cheap and capable cloud-based suites, with offline capabilities, gain traction.
What does that mean for Zoho? Run faster and hope that Google and Microsoft move slowly.
On June 27, Microsoft Chairman Bill Gates said he didn't think that his company and Yahoo would make a deal, adding that Microsoft CEO Steve Ballmer will find "plenty of other opportunities.
Not so fast. As Yahoo's quarterly earnings come up on July 22 (see Kara Swisher's take on the upcoming financial results) and the shareholder meeting on August 1, Carl Icahn and Steve Ballmer are teaming up to remake Yahoo's board of directors and shelve Yahoo CEO Jerry Yang. In a letter to Yahoo shareholders, Icahn said:
Steve (Ballmer) made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the 'Search' function, with large financial guarantees or, in the alternative, purchasing the whole company."
Microsoft issued a letter today confirming Icahn's remarks about Microsoft's renewed interest in a transaction with Yahoo:
While, of course, there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo's shareholder meeting, if a new board is elected.
Now the fate of Yahoo is clearly in the hands of shareholders. They can give Icahn a few seats on the board but not enough control to force massive changes or they can hand over the company to him and Microsoft, knowing that a transaction for $33 to $35 per share for the search business or the entire company will be consummated over the next six months.
As I have said before, Microhoo has always been about the money, and less about a shared strategy and cultural fit. Yahoo's board thought that Yahoo was worth $37 per share, and Microsoft wasn't going to negotiate against itself, with no other buyers in sight.
During an interview at the D6 conference, Yang said:
I understand the situation people are feeling, but at the same time we did not walk away from that proposal, Microsoft did. We are willing to do a deal under the right terms. It wasn't clear to me they wanted to finish the deal. I can't go revisit and take or not take it. I understand our obligation to stockholders from conversations with a number of them. The focus for us is how do we recognize more value for the company soon and position Yahoo to be much more successful in the long term. If there is a way to do it, we'll talk about other alternatives, but we aren't going to do something short term.
Yang has some regrets that Microsoft walked away from negotiations in May. He may prefer an independent Yahoo, but reality is setting in, and now he is probably wishing he and his board had played less difficult to get.
Update: Yahoo issued a testy statement regarding the Icahn-Ballmer "apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future 'negotiation' between Mr. Icahn's directors and Microsoft's management."
In the statement, Yahoo invited Microsoft to make a proposal immediately and for Icahn to reveal his plan for Yahoo beyond teeing up Microsoft to make a deal. I doubt Jerry Yang and company are going to receive any kind of proposal until the shuffle at the upcoming shareholder meeting takes place.
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss this week's big stories. It was a busy week on the search front. Adobe is providing Google and Yahoo with Flash Player technology that allows their search engine crawlers to find and index SWF content, including Flash "gadgets" such as buttons or menus and self-contained Flash Web sites. It's good to make more information accessible via search engines. However, Microsoft has been silent on whether Live Search would index Flash content.
In addition, Microsoft bought Powerset for about $100 million to enhance its search platforms. It's not a substitute for acquiring market share via Yahoo Search, but it provides a foundation for making the search experience far more compelling and precise in fewer clicks.
Of course, the Microhoo drama continues this week with the latest rumors. Larry is ready for this opera to be finished.
Finally, we discuss a judge's ruling in Viacom's $1 billion copyright infringement suit against Google and YouTube.
U.S. District Judge Louis L. Stanton ruled that records of every video watched by YouTube users, including login names and IP addresses, should be given to Viacom's lawyers. Larry said it was like combining the worst aspects of a fishing expedition and a witch hunt. Viacom is maintaining that it won't look at personal data and Google is asking for time to anonymize the information. If Judge Stanton's ruling stands, the last shreds of personal privacy on the Web could be thrown out the window.
As expected (see previous reports), Microsoft scooped up Powerset to buttress its search efforts.
Barney Pell, Powerset co-founder and CTO
(Credit: Dan Farber)It's not a replacement for increasing market share by acquiring Yahoo Search, but it gives Microsoft some differentiated search technology and top engineers for less than $100 million. Ramez Naam, group program manager of Live Search, said the Powersoft negotiations happened in parallel with the Yahoo talks over the last few months. Google and Yahoo may also have been interested in Powerset, but no one is talking.
Whether Microsoft can leapfrog Google over the long term with this semantic engine remains to be seen.
Powerset had done a good job of creating a rich semantic layer on top of Wikipedia, but bringing natural language and slick semantic-based interfaces to the entire Web is a long-term and very costly endeavor.
"With an existing search infrastructure, incredible capital resources, unlimited data, a leading search team, and clear mission to revolutionize the search landscape, Microsoft can rapidly accelerate our progress in building semantic search technology and bringing it to full Web scale," Powerset's Mark Johnson said in a blog post about the acquisition.
Powerset can provide direct answers to queries from its Wikipedia and Freebase index and highlight the most relevant search results based on the meaning of the query.
According to a blog post from Satya Nadella, Microsoft's senior vice president of Search, Portal, and Advertising, Powerset's engineers will join the Search Relevance team and remain in San Francisco.
Back to the leapfrogging Google question. Much of what Powerset has enabled with its technology is a superior user experience for searching. Powerset's Wikipedia search, which surfaces concepts, meanings, and relationships (like subject, verbs, and objects in a language), is the very small tip of the iceberg.
If Microsoft can succeed in extending Powerset's technology to key parts of the Web corpus, Google will have to figure out a way to match the quality and user experience. And, there is little doubt that if Google decided that what Powerset and Microsoft are doing as one is important, the company dedicated to dominating search through its engineering prowess will circle the wagons.
A few months ago, Powerset co-founder and CTO Barney Pell told me that his start-up company's software was a first step in changing the way users search and consume Web content. "It's a complete shift. You see this and you want to experience all content in this way. And, as an introduction, it will drive huge investment in semantic and linguistic technology, just as investments were made in information retrieval and scalable databases in the past," he said.
During a conversation after the announcement, Pell told me, "Natural language search will be the center of innovation for the next 20 years." It will likely take 20 years to engineer the semantic, natural language Web that Tim Berners-Lee envisioned in his 2001 essay in Scientific American.
Today is Bill Gates' last day in the office as a regular employee of the company he co-founded in 1975. But as non-executive chairman and someone who is deeply married to Microsoft, Gates is not disappearing from the company.
Chairman Bill Gates
(Credit: Dan Farber)The transition has been well orchestrated, and he will still spend about 20 percent of his time working on Microsoft issues, such as the next-generation Office, natural interfaces, and search. And, he will still obsess and strategize about how to defeat Google.
Bill Gates field questions from this reporter.
(Credit: Michael Arrington)I have been covering Microsoft and Bill Gates for the last 25 years, and I've had a few memorable run-ins with the him over that time. I remember asking him about upstart programming language Java's write once/run anywhere capability in an interview I did with him in the early 1990s. He sat forward in his chair and said with conviction that Java was a stupid idea. Behind that answer, the hyper-competitive Gates was thinking about how to slay the Java dragon. Several years later Microsoft C# appeared.
And who can forget his duel with David Boies in the U.S. Justice Department vs. Microsoft antitrust case. Gates believed that the government was out to destroy Microsoft, and went on the offensive. To this day, he chafes at being called a "convicted monopolist."
In many ways Gates is very much the same as when I met him a few decades ago. His tenacity, intellectual intensity, passion for technology, and competitiveness have remained intact. Now he will be applying those character traits more fully to eradicating polio, malaria, AIDS, and other diseases at the Bill & Melinda Gates Foundation.
I can imagine one of his chief rivals, Steve Jobs, giving him a gold-plated iPhone 3G for his retirement with the inscription: "To Bill Gates: Look who's ahead now. Best of luck, Steve Jobs."
That would like dangling meat in front of a hungry lion. Gates would accept the gift with a wry smile and at the same time think about what it would take to trump the iPhone. Even though Vista didn't leapfrog the Mac OS, and Microsoft has rarely been able to out-innovate Apple, the fire is still burning and Gates will be firing off a flurry of e-mails to Steve Ballmer and others he's left in charge.
Chairman Bill Gates and three top execs: Craig Mundie, Ray Ozzie and Steve Ballmer
(Credit: Microsoft)In an interview this week, Tom Brokaw of NBC asked Gates if he had an iPod. He responded, "No," and added, "The Zune is a better way to carry your music around." Vintage Bill Gates competitiveness.
(Credit:
NBC)
The planet will be better off with Gates focused on technologies and strategies for saving lives rather than defeating Steve Jobs.
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Speaking at Structure 08, Debra Chrapaty, corporate vice president of Global Foundation Services at Microsoft, shed some light on the cloud-based infrastructure supporting Microsoft's online services.
Despite characterizations that Microsoft is stuck in the client/server world, the company is spending billions to apply the cloud, or server/client, model, where most of the computing happens in the cloud and some small amount on the client (offline support for applications). But until Microsoft Office and other applications are built for the cloud, the laggard characterization will continue to stick to the company's forehead.
Debra Chrapaty, corporate vice president of Global Foundation Services at Microsoft.
(Credit: Dan Farber)Microsoft has one of the biggest collections of Web sites, with 550 million users, 2 billion search queries, and 10 billion page views per month, as well as 8 billion messages on Microsoft Messenger per day. The company deploys 10,000 new servers per month on average to keep up with demand, Chrapaty said. She broke down Microsoft's model for building infrastructure into a three-letter acronym.
The cloud is all about GET--Growth, Efficiency, and Trust, Chrapaty said. In terms of growth, data centers are a $300 million to $500 million investment. "You have to make every kilowatt count," she said, noting that Microsoft has 35 criteria, such as network egress, power, and available staff, to determine locations for data centers.
Efficiency involves tools for manageability, operability, and sustainability, which translate into cost savings. "It's nice to go to Steve (Ballmer) and say you can save millions of billions of dollars," she said. Trust is having the security, reliability, availability, performance, and familiarity with the local languages and markets, Chrapaty explained.
Trust is also the user community feeling that privacy will be respected as people live their lives on line. That is a challenge that every large site will have to grapple with long after technology issues are resolved.
Click here to see more stories from the Structure 08 conference and on cloud computing generally.
Today Salesforce.com announced a "global strategic alliance" (also known as a partnership) with Google, introducing a new integration point, Force.com Toolkit for Google Data APIs. The alliance allows developers using Salesforce.com's cloud-based development platform to integrate with data from Google services via Google Data APIs. This integration service is in addition to Salesforce for Google Apps, which integrates Google's suite of applications with Salesforce.
Marc Benioff wants to remake the business software world.
(Credit: Dan Farber)CODA, which is developing a financial suite of applications on the Salesforce platform (Force.com), has developed a prototype that takes data from Google Spreadsheets and brings it into an Order-to-Cash module.
This latest coupling with Google is part of Salesforce.com CEO Marc Benioff's quest to remake the software world and replace Microsoft as a leading business software platform for building any kind of application. Remaking the software world means moving from client/server solutions to multitenant, cloud-based, on-demand, software-as-a-service, utility computing, platform-as-a-service applications or whatever assemblage of words describes Web-centric computing. They could also be called "server/client" systems, since Salesforce.com, Google, and others offer offline access to the applications.
Part of Benioff's strategy over the years has been to draw attention to his company by picking on his biggest potential competitor--Microsoft. His mantra is "the end of software," referring to the kind of client/server applications embodied by Microsoft Office. In a March interview with CNET News.com, Benioff said:
I think Microsoft is still a dinosaur. More than ever, it tries to hold onto its monopolistic position around technology that they hold, whether it's SQL Server, whether it's NT, whether it's Windows, whether it's Office--these are their cash cows they don't want slaughtered.
The other part of Benioff's strategy is to align with Google against Microsoft. "The enemy of my enemy is my friend, so that makes Google my best friend," Benioff has said.
But the reality is that Microsoft Office is an essential part of the Salesforce ecosystem. Benioff told me that a very large percentage of our customers do integrate with Microsoft's desktop apps. But he seems to be encouraging customers to abandon Microsoft Office and adopt Google's applications.
Benioff touts that the most downloaded applications in the Force.com AppExchange are related to Google, such as Appirio Calendar Sync for Salesforce and Google Apps and Gmail to Salesforce Browser Button for Firefox. But Microsoft's popular Word and Excel integration for Salesforce.com is not available via the AppExchange, so it's unclear as to how it compares in terms of usage to the Google-related products in AppExchange.
Benioff has been visionary in pushing a new model for business applications and adept at generating headlines. But it is way too early to count Microsoft out. This is just the beginning of a new software era, and Microsoft hasn't yet decided to make it more interesting, but it will.
