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Allan Afuah
  Allan Afuah

And In This Corner, Google

7/27/2009 --

As Google and Microsoft go to war over operating systems, Ross strategy professor suggests both companies focus more on innovation, less on locking horns.

ANN ARBOR, Mich. — Google fired another salvo in its ongoing battle with Microsoft recently when it announced plans to offer an operating system based on its Chrome software. The two giants already face off in the areas of search engines and web browsers; Google’s latest move shows the company is trying to tap the burgeoning market for netbook computers that exploit cloud computing. But going to war with a rival like Microsoft can be costly and risky -- even for Google, says Allan Afuah, associate professor of strategy. A more effective strategy would be to innovate and change the game. Google also might want to find a way to better monetize its newer technologies, Afuah says.

Google recently announced it would launch an operating system for PCs, which looked like another broadside against Microsoft. Google and Microsoft also have been battling in other areas. What does this latest move reveal about the way Google is playing the competitive game?
Afuah: Some would say Google is doing this to keep Microsoft occupied and worrying about operating systems so it won't be able to attack Google effectively in the search business, as it's trying to do with Bing. I believe Google is looking forward to what may be a disruptive technology. People are moving toward so-called cloud computing, where almost everything you need is going to reside in banks of servers somewhere instead of on the desktop. Even if you have a small netbook computer, you can access information in these banks of servers by way of the Internet. So by introducing this operating system, Google is trying to get into that growing business. For now, Google's operating system is not something that will be competing with Microsoft on the desktop. It will be competing on netbook computers connected to the Internet. These netbooks are gaining a lot of favor, especially with younger people. If Microsoft does not react well, then Google’s operating system may improve to a point where it can be used on desktops, posing problems for Microsoft’s very profitable operating system business.

What do you think about the upcoming alliance between Microsoft and Yahoo?
Afuah: The proposed alliance is a good start for both firms. Yahoo gets to cut some of its costs, and Microsoft gets extra revenues. However, to be a game changer against Google, both firms must do something compelling enough to attract and keep Google’s customers, or win a higher percentage of customers to Bing (over Google) than they presently do. From the details of the alliance released so far, there does not appear to be anything game-changing when it comes to competing and winning against Google.

Most of Google's revenue comes from online advertising, and now they're getting into online software. Do they have to change their business model?
Afuah: This is a new game. The question is: What do they have to do to actually make money? Whether they will actually make money depends on Microsoft's reaction. When it comes to actually making money, Microsoft is in a better position than the U.S. mint. Microsoft spends $1 billion to develop an operating system and in one-and-a-half months, they will cover the $1 billion. After that, every $1 billion every month-and-a-half after that is pure profit. All they have to do is ship the code to the Dells of the world who ship out the computers. If you're Microsoft, are you just going to sit around and let somebody take that business or are you going to do something? So Google has to watch out for Microsoft, because I really don't see a lot of money in it for them, not yet. When you look at the number of people who use netbooks and cloud computing alone, the numbers are still small. Down the line, if Microsoft lets Google capture the netbook computer market with an operating system that's simpler to use, then this may become a problem for them. It may become so good online that Google might develop an operating system you could use without connecting to the Internet. That could come and eat Microsoft up in an area they didn't expect.

How do you think Microsoft will respond to this?
Afuah: We're already seeing some signs. I think Microsoft knew Google was doing something before Google announced it. Microsoft announced a version of their operating system that works for netbooks. So they already did something about it. But they also need to be very careful. If they go into that market and don't pay a lot of attention to Google, and Google produces something that's very sleek and uses less memory space, then Microsoft may be in trouble down the line.

Google is a small player in these new markets they're entering. Is there a way to leverage their gigantic share of the online search market to tap these new markets?
Afuah: I think the biggest thing Google has is its brand. My biggest problem with Google, and I tell my students this, is that it's paying too much attention to the technology and should be more concerned about creating a business model that will help make money. I really don't think Google spends enough time thinking about its business. Google thinks it is a high-tech company that's going to hire the brightest people and best technology. In the end, unless you find a way to monetize it, you're not going to make much money. In this case, the only thing I can see that Google can leverage at this point is its brand. Google makes almost all of its money from the advertisements on the search engine.

Google seems to face another risk as it expands. There's a whole community of critics who complain about their wide reach and collection of data. As the company moves into new areas, its competition could foster some of these privacy concerns. Is that a real business risk or just something that makes good headlines?
Afuah: I think there's a real risk. People who read these stories are Google customers. If people don't trust you or what you do, that can create big problems down the line. I think that's another area where Google should spend more time trying to explain things to people. That's almost as important as trying to find new business models. Remember, some people were very upset to hear about the computer program that scans through Gmail to look for key words to know what kind of advertising to present. People thought somebody was reading their email. But really, a computer does that. No human being reads the mail. You have to let people know that. Google has to explain things very well to people. They need to say, "We understand where you're coming from, but this is how we're trying to make money. If we don't do that, we can't provide you with this free service." They need more of that.

What about Microsoft? Do they suffer from some of the same issues Google has?
Afuah: Even though Google is a much newer and smaller company, I think the similarities between Google and Microsoft are a lot larger than most people think. First, each company makes a lot of money from something they didn't necessarily invent. When Microsoft entered the video game business, they should have done what Nintendo did. Instead of trying to outmuscle Sony's PlayStation, they should have done something different. The Nintendo Wii is a very different game experience. Microsoft hasn’t made any money out of games. They haven't made much money out of searches. The same goes for Google. They should go into these new markets and do something like Nintendo, offering a wholly new experience. I don't think the operating system is like that. I don't see much difference between the two companies. One is much bigger, maybe a little smarter about making money.

These two companies have really stepped up the competition against each other recently. Are they fighting the right battles?
Afuah: As somebody who believes in innovation, I'm never in support of entering a business to lock horns with somebody. There's enough room there to go in and do something different. Just like Nintendo did with the Wii. You don't have to go in there and start locking horns with each other. From my own research, that's what really kills them. Look at Ikea. When they came to the U.S. they could have tried to fight Ethan Allen. But they said, "This is a different experience. Come take this furniture and assemble it yourself." Will everybody like that? No. Some people hate it. But it's a different experience and some people like it and they've done very well. I'm a true believer in innovation and not fighting the enemy head on. You both lose. You spend time trying to kill each other instead of working hard to create new things. When you are trying to introduce new products that do different things, you're still competing. You don't have to compete by putting the other person down.

Afuah is author of Strategic Innovation: New Game Strategies for Competitive Advantage (Routledge, 2009). In November, he is teaching a short course on innovation for executives. Click here for details.

—Terry Kosdrosky

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