Friday, August 07, 2009

The Microsoft-Yahoo deal, Part 2 (the chapter of Microsoft)

The part 1 tells how I believe that the deal actually offers Yahoo a chance to be reborn. In part 2, let's turn to Microsoft, the other side of the deal.

On the contrary to what they think of Yahoo, many analysts gave Microsoft more or less the positive evaluation about the deal. The mainstream opinion is that the deal will give Microsoft "the scale", which the company eagerly looks for but lacks until now, in order to compete Google. In a BoomTown interview by Kara Swisher, Satya Nadella, the SVP of Research and Development at the Online Services Division in Microsoft, confirmed the point. "[Search] is a game of scale," Nadella said.

Nadella is right; so are the many analysts. Web search is a game of scale. The problem is, however, how to approach the scale in contrast to simply purchase to a greater scale. Scale itself is not the panacea. The way of scaling, or how to scale, is really the issue. It is this "how", however, that makes me feel hesitate to congratulate Steve Ballmer enthusiastically.

Microsoft gains scale from the deal. Because of the gained scale, however, Microsoft is likely trapped itself into a Google-directed game. Forgive me repeating myself again. You can never defeat Google by executing in the Google way; even though it is Microsoft. This is the core of the problem.

To express my point better, let's take a look at the issue in two folds.

(1) Let's study how Google is invading the Microsoft territory, in particular MS Office and Windows.

Within their own dominant territory, Microsoft and Google are conceptually exchangeable. It is safe to say as well that "you cannot defeat Microsoft by executing in the Microsoft way." Both Microsoft and Google are the rule designer and the rule maintainer in their own territory. Nobody may seriously threat, let it alone defeat, them in their own field if the challenger is competing in the rules created by these monopolies themselves.

Google understands this point. Hence Google says, "well, let's play the game in some new rules." With this thinking, Google turns the Office software to a set of Web services whose basic and the most frequently used functions are free to the public. The plan is that it may gain a large enough user base by the free services, Google can thus provide the users more sophisticated data processing or analyzing services (which will not be free in either the sense of user subscription or the sense of advertisement augmented) surrounding the user-generated data, which is produced by the free services.

The plan tells that Google has invented an important game-changing point. The behind story is that Google decides to replace the service-oriented monetizing strategy on the Office software (which Microsoft controls) by the new data-oriented monetizing strategy. In the new strategy the service to produce data becomes free, while the services that consume the produced data will NOT be free.

After the initial (still moderate so far) success, Google is continuing the invasion into the deeper core of Microsoft---the Windows operating system. Again, Google realizes that it is impossible to compete Microsoft directly in the rules Microsoft executes. Therefore, Chrome OS is a very different operating system. It likely will not support operating many of the desktop-oriented tasks. In exchange, Google pays nearly the entire attention to improve and facilitate the way of utilizing the Web resource consumption from any arbitrary terminal. By providing the users a free operating system that can access and consume the Web, what Google plans is to grasp the control of directing and managing the flow and distribution of the Web resources to the end users. Once (or if) Google reaches the goal, we may not even imagine at present how great the new market will be. This is, again, a game-changing policy.

Google proves its creativity in competing against Microsoft. It competes but not follows the rules Microsoft controls. Now we may understand better why Microsoft is doing wrong (or at least not as good as Google).

By publishing Bing and dealing with Yahoo, Microsoft plays like a game chaser instead of a game changer. Yes, there are tactical inventions within Bing. By studying the Bing architecture from 5000 feet high, however, we find that Microsoft has indeed invented nothing but to copy the success of Google search in insignificantly different ways. Microsoft, or the combined MicroHoo, search is certain to generate a few buzz. But to defeat Google, or even to battle a significant decent share out of the mouth of Google, it will be unlikely.

(2) Let's study again the "scale".

Scale does not equal to make profit, at least it does not necessarily be immediate to generate revenue. Twitter is a typical example. Despite we do not deny the potential of the service, in reality it has taken the Twitter investors long time to look for a proper business model, and they are still seeking.

Certainly, however, Web search is a much more mature field. Microsoft believes that it has already fully understand how to monetize Web search as long as it gains enough size in scale. The method is the business model Google invented and is executing now. Thus by "scale" Microsoft means is to gain a large enough base of the daily visitors to its search engine so that the number could be large enough to ensure decent profit to the advertisers in the Microsoft search platform.

The thought is reasonable and actually has no problem at all if it is thought by anyone else except Microsoft. Pitifully, Microsoft might have forgotten one thing---what Microsoft lacks the least is the scale in terms of the number of users. Microsoft has a product whose user base is greater than any other software product or service, and its name is Windows. In contrast to dealing with Yahoo and then trapped itself into the running track Google trademarked, what Microsoft really needs to do to reach a compelling, Google-scared, scale is to convert its own users instead of to purchase the Yahoo users. By doing so, however, it really requires innovation that Microsoft probably lacks.

Let's take a back look of what Microsoft has done. During the first tide of Web hype (the years prior to the dotcom bubble), Microsoft had seen the business opportunity on user consuming the Web resources. At the mean time Microsoft believed Web browser be the answer. It seems that it was the Web browsers that connected the users to the expected Web resources. By this vision, Microsoft created Internet Explorer.

At the same time, however, the Google founders saw the things differently. (As well as the Yahoo founders, but Jerry Yang's vision was too much ahead of its time, unfortunately.) Larry and Sergey noticed that it was not the browsers that directed the traffic; it should be search engines that are independent to the browsers. The understanding changed the entire game. Soon search engine replaced Web browser becoming the most profitable business model on helping user consuming Web resources.

History repeats. Still the same issue of user consuming Web resources. This time Microsoft believe it finally got the point: search engine matters more than browser. But again, the recognition is too late because the Web does not stop in its origin; the Web evolves forward uninterruptedly. By the passing of Web 2.0, the most glorious time of the traditional Google-style Web search is passing. Ironically, Google itself actually has shown us a little bit hint by announcing the light-weighted Chrome OS, which could be independent to the search engines. Indeed the issue is much more profound than simply Web OS. But I would rather not tell too much in this post since it is distracting.

The main point here is that Microsoft misses the key. The key is not search; the key is to help the Web resources be properly consumed. Or even a step further, to help ... [omitted intentionally] (I bet Google might know what I had not typed here but Microsoft must not.) Search, the same as browse back in 90s, is only a path to the gold mine instead of the gold mine itself. Web evolution is driving us closer and closer to the golden mine itself, by which means that we must always be ready to adjust our strategy whenever a milestone of Web evolution is passing.

To seek for scale is not problem. That Microsoft seeks for the scale in this way is pitiful.


In the May 2008, I was invited to be interviewed by the Live Search team along with 27 other PhD students in US and Canada. Before the interview, I had already some thoughts on leveraging the Live Search to compete against Google. In addition to the post I wrote on April 29, I also had produced a private PowerPoint slide that was sent to the Live Search team (which was never discussed ever after, however). In the slides, I briefly introduced the Live Search team a broad picture on why and how Microsoft might win the battle against Google. Now when I look at the slides again, it is still fresh to myself though certainly I could do the slide much better after another year of studying and thinking of the issue.

Unfortunately, after I reached Redmond I found that actually Microsoft was not looking for genuine ideas but to find fresh mind who could help implement their made-already plot (or even to excuse themselves that their plot was the right approach to go for). I did not fit the suit since my thought could not syndicate with theirs.

Until today, however, I still felt regretted of the trip. Microsoft is truly the one that may overtake Google. But it is not in this way as the MicroHoo deal told. Microsoft has overlooked a critical value in itself, which I would rather not share in public. Now with the Yahoo deal, it seems that the last chance is taken away.

The deal grants Yahoo a chance to be reborn. At the same time it seals probably the last chance for Microsoft to defeating Google.


Marin Dimitrov said...

traditionally Google has been employing disruptive innovation (see Innovator's dilemma) to invade the low-end and low-margin markets, then gain scale and move up-market

A disruptive innovation usually occurs when the performance or functionality of an existing technology/product starts exceeding the needs of specific customer segments. The disruptive innovation provides a product which is initially inferior in terms of functionality/performance, but still satisfies the demands of certain market segments, and at the same time has lower price and provides some additional improvements

products & technologies like:

* Google Docs (vs MS Office)
* ChromeOS (vs Windows)
* Google AppEngine (vs .Net or J2EE)
* and even building a highly scalable infrastructure with a huge number of low-cost computers (vs supercomputers)

... can all be characterized as disruptive since they don't try to out-compete the existing products in terms of performance or functionality, but to offer different type of value and benefits, initially targeting the lower segments of the market and the gradually invading the up-marget segments

Microsoft on the other hand is traditionally good in sustaining innovation, i.e. improving existing products based on functionality/performance criteria and expanding existing markets. Since Microsoft has a leading position in most of these markets (office, OS, ...), they are also very vulnerable to "disruptors" like Google, who are playing a different game (since they have no chance to overtake the leader otherwise)

Your analysis on how Google is changing the game to invade the Microsoft territory is correct, but note that Microsoft cannot easily do the same. In "The Innovator's Dilemma" Christensen identifies a number of reasons why market leaders and companies focusing on sustaining innovation usually fail when they try to employ disruptive innovation too - e.g. corporate values and processes which are tailored to one kind of innovation (but inefficient for the other), fear of cannibalizing its own products and markets with the disruptive innovation, focus on high-margin markets, etc... So in a way, it's exactly the values and processes that made Microsoft so successful, which are making it so inefficient against a "disruptor" like Google

I agree with an older analysis of you that Microsoft should try to leverage its Office/Windows user base to build a new kind of search experience (and thus be a "disruptor" against Google in the market it dominates) instead of focusing again on sustaining innovation (by merging with Y! and acquiring its user base) but afterall, sustaining innovation is what they're good at...

Yihong Ding said...


thank you for the thoughtful comment. It is interesting to watch how Microsoft is reacting to the challenge from Google.