Here's an interesting read from Fortune's FRED VOGELSTEIN.
SEARCH AND DESTROY Bill Gates is on a mission to build a Google killer.
What got him so riled? The darling of search is moving into software--and that's Microsoft's turf.
FRED VOGELSTEIN
Fortune
MICROSOFT WAS ALREADY MONTHS INTO A MASSIVE project aimed at taking
down Google when the truth began to dawn on Bill Gates. It was December 2003.
He was poking around on the Google company website and came across a help-wanted page with descriptions of all the open jobs at Google. Why, he wondered, were the qualifications for so many of them identical to Microsoft job specs? Google was a web search business, yet here on the screen were postings for engineers with backgrounds that had nothing to do with search and everything to do with Microsoft's core business--people trained in things like operating-system design, compiler optimization, and distributed-systems architecture. Gates wondered whether Microsoft might be facing much more than a war in search. An e-mail he sent to a handful of execs that day said, in effect, "We have to watch these guys. It looks like they are building
something to compete with us."
He sure got that right. Today Google isn't just a hugely successful search engine; it has morphed into a software company and is emerging as a major threat to Microsoft's dominance. You can use Google software with any Internet browser to search the web and your desktop for just
about anything; send and store up to two gigabytes of e-mail via Gmail (Hotmail, Microsoft's rival free e-mail service, offers 250 megabytes, a fraction of that); manage, edit, and send digital photographs using Google's Picasa software, easily the best PC photo software out there;
and, through Google's Blogger, create, post online, and print formatted documents--all without applications from Microsoft.
While Google was launching those products--all of them free-- Microsoft has been trying in vain to catch up in search. It has spent about $150 million on its search project, code-named Underdog. But Google and lately Yahoo keep leaping ahead with innovations like local-area search complete with maps and satellite photos, ways to search inside a video file, and search designed for cellphones. Simply put, Google has become a new kind of foe, and that's what has
Gates so riled. It has combined software innovation with a brand- new Internet business model--and it wounds Gates' pride that he didn't get there first. Since Google doesn't sell its search products (it makes its money from the ads that accompany its search results), Microsoft can't muscle it out of the marketplace the way it did rivals like Netscape. But what really bothers Gates is that Google is gaining the ability to attack the very core of Microsoft's franchise--control over what users do first when they turn on their computers.
Google co-founders Sergey Brin and Larry Page and CEO Eric Schmidt all say that any talk about supplanting Microsoft is ludicrous. But the idea that Google will one day marginalize Microsoft's operating system and bypass Windows applications is already starting to become reality. The most paranoid people at Microsoft even think "Google Office" is
inevitable. Google is taking over operating system features too, like desktop search. There are fewer uses for the START button in Windows now that Google's desktop search can locate any program, document, photo, music file, or e- mail on a computer.
All of which helps explain why inside Microsoft, the battle with Google has become far more than a fight over search: It's a certifiable grudge match for king of the hill in high tech. "Google is interesting not just because of web search, but because they're going to try to take that
and use it to get into other parts of software," says Gates as he leans forward in his chair, his body coiled as if he could spring to his feet at any second. "If all there was was search, you really shouldn't care so much about it. It's because they are a software company," he says.
"In that sense," he adds later, "they are more like us than anyone else we have ever competed with."
Though CEO Steve Ballmer has been boss for five years, Gates, who is chairman and chief software architect, is leading the charge against Google. Forced to watch Google's stock soar the way Microsoft's used to, and Brin and Page enjoy their roles as tech's new rock stars, Gates
brings to the fight a ferocity that nobody has seen since the Netscape war a decade ago.
Their popularity gets under his skin. "There's companies that are just so cool that you just can't even deal with it," he says sarcastically, suggesting that Google is nothing more than the
latest fad, adding, "At least they know to wear black."
Just how big is Microsoft's Google problem?
First, a reality check: Microsoft, with nearly $40 billion in revenues, is ten times the size of
Google. It's sitting on $34 billion in cash, generating $1 billion in new cash a month, and, thanks to its core Windows, Office, and server products, growing at 15% a year, with operating margins above 30%. Most companies would love to have such numbers. But Microsoft isn't exactly in fighting trim. Its ambitious new operating system, code-named Longhorn, is more than a year late, even after having been scaled back. Linux, the free operating system that Gates once scoffed at, is fighting Microsoft for share in both the server and desktop markets, forcing the company to do the unthinkable: offer customer discounts. Last year it had to spend $1 billion to
rewrite thousands of lines of code to make its programs less susceptible to viruses.
Its Xbox gaming console is winning raves from players but has yet to make serious money. Meanwhile, Apple has stolen the show in online music with its hugely popular iPod and iTunes Music Store. Plus, the recently released Firefox browser, which can be downloaded free,
has forced Gates to reconstitute an Internet Explorer development team.
Indeed, four years have passed since Microsoft released a piece of software that generated the kind of buzz Google seems to generate every month.
Dozens of current and former Microsofties say that Google's success is causing a corporate identity crisis. Gates basically created the notion that success in software is a function of the IQ of your team, and for years Microsoft has prided itself on having the smartest employees on
the planet. Now many of those overachievers feel as though they've gotten their first B. Google, not Microsoft, is the hot place to work for young engineers. Every month it seems as if Google hires away one of Microsoft's top developers.
Before Google's IPO last fall, Microsoft executives dismissed this brain drain as a function of greed. But when the exodus continued after the IPO--especially when Marc Lucovsky, one
of the chief architects of Windows, bolted for Google--it was clear that Microsoft had a bigger problem on its hands. As of March, roughly 100 Microsofties had left for its search nemesis.
Google has even had the nerve to set up an office five miles down the road from Microsoft's Redmond, Wash., headquarters. Its opening last November was supposed to be an invitation-only affair, but word spread and by 7 P.M. The place was swarming with dozens of uninvited
Microsofties--casually, and sometimes not so casually, looking for work.
The Google migration has gotten so bad, says a former Microsoft employee, that when he told his bosses and colleagues he was leaving earlier this year, "the first question out of their mouths was 'You're not going to Google, are you?'" (He was not.)
Perhaps worst of all, Google is building programs that people at Microsoft prefer to their own. Microsofties have always been voracious samplers of competitors' products; many used the Netscape browser for years until Microsoft's Internet Explorer was good enough. But today,
stop almost anyone on campus and ask which e- mail or photo or blogging program he uses, and the answer will invariably be Google's. No wonder Bill Gates is mad.
To understand why Microsoft is having so much trouble catching Google,
it helps to hear the story of Chris Payne. He had been watching Google
closely for months by the time he got Gates' ear in February 2003. A
newly minted vice president charged with overseeing a grab bag of web
products for MSN, Microsoft's web portal, Payne stepped to a podium in
the conference room in building 36 at the Redmond campus. Peering at
his audience--Gates, Ballmer, and about two dozen other Microsoft brass--he
launched into the most important pitch of his career. He asked them to
approve a massive push into the search business--a Google killer.
Payne, 37, was nervous but pumped. Although Ballmer was present,
everyone knew no big technology project got a green light without
Gates' say-so--and the chairman never said yes until he had subjected the idea
to a withering barrage of questions. Zapping through PowerPoint slides,
Payne spoke for two hours, showing in painstaking detail how MSN was
making a monumental mistake outsourcing its search function to third
parties.
In those days Inktomi, a small firm that had agreed to sell
itself to Yahoo in December 2002, provided MSN's search results.
Overture, a brainchild of Idealab's Bill Gross, supplied the ads to go
alongside them. In hindsight, outsourcing search looks dumb, but back
then, search was widely viewed as a money loser. Payne explained how
Google was developing a great search engine, and how its minimalist
design and consistently relevant results--better than those delivered
by MSN's cluttered site--were attracting legions of Internet users. Worse,
Google had unlocked the secret of online advertising; its automated
system noted a user's search request and then delivered discrete
matching ads alongside the results. That enabled the Internet upstart
to generate gobs of cash. The impact on MSN was obvious. "I'm seeing
revenue in the category go up, and I'm seeing our market share go
down," Payne said later.
Payne told Gates & Co. that he would need more than $100 million and 18
months to build his search engine; that he wanted the authority to pull
the cream of Microsoft's brainiacs into the effort. And Gates? He asked
almost no questions, interrupting mostly to suggest people in Microsoft
who might help.
"It was reasonably obvious to me that we were going to
have to depend on ourselves, not our partners, for search," says Gates now.
So when Payne finished, Gates signed off on one of the largest
commitments for a new business in Microsoft history: Project Underdog
was born. Payne could hardly contain himself. "I was very, like, God!"
he says, pumping his fist. "I had done all this work, and then I'm like, 'He said yes!' Honestly, it was awesome." It was the last easy win for Payne. Last November he released
Microsoft's search engine, followed in December by a desktop-search
tool (two months behind Google) and in March by a search-related advertising
business. Microsoft supported the launches with a $150 million ad campaign and scores of other promotions. But the effort has generated little buzz so far, and Microsoft's global market share, at about 13% of search requests, remains puny.
Yet Payne seems impervious. A gregarious Kentuckian with a devilish Jim
Carrey smile, he talks in wide-eyed bursts. He seems to be in motion
even when he's at rest. Since taking charge of the search effort, he has
become well known within the company not just for energy and charisma
but also for toughness. Gates may have given him a pass during that
initial presentation, but Payne has been at the receiving end of plenty
of vicious tongue-lashings since then, during his monthly meetings with
Gates and in the weekly e-mails he receives from his boss.
Payne joined Microsoft right out of Dartmouth in 1990, eventually
ending up as a marketer and strategic planner for the company's
database-software business. His first break came in 1995 when he was
transferred to the then-fledgling MSN division. He was one of the
original three employees on MSN Investor, playing a critical part in
making it one of the best financial websites. But he didn't stick
around to reap the rewards. He jumped to Amazon in 1999, only to discover that
working there was more about retailing and merchandising than he had
thought it would be--he missed building and selling software. By early
2002 he was back at MSN, running its home page and search, among other
things. Over the course of that year, he saw Google's threat and began
formulating the plan for Underdog.
The project's beginnings were auspicious. With Gates' backing, Payne
recruited top talent throughout the organization, like Ken Moss, whom
he brought in as chief engineer. Moss had been instrumental in the early
1990s in creating Excel, Microsoft's spreadsheet program. The fledgling
search unit quickly grew to roughly 500 engineers and marketers.
Nevertheless, it successfully cultivated a startup--even renegade--mentality.
Payne's managers bragged to underlings that they
had the clout to poach anyone inside Microsoft. And the focus was on
winning--in the halls near Payne's office, the walls were covered with
performance reports on the group's servers, comments from customers on
how Microsoft could improve, and media clippings about Google.
For six months the team even bought its own servers. Gaining clearance
to run and monitor the project on the corporate server farm would have
been too time-consuming, Payne's team felt--not to mention the strain
an ambitious search offering would put on the systems. (Google is widely
estimated to run 250,000 servers to support its search.) The technology
they eventually unveiled used a heavily modified version of the Windows
server operating system. All its other components were of their own
design, run with a lot of software they had written themselves.
Confidence ran high. A senior Microsoft executive said the top brass
thought the fight against Google "was going to be Netscape all over
again." Microsoft has a long, dramatic history of being a fast
follower, rarely first in a market but ultimately providing the most accessible
and practical solution, then outmarketing competitors. The company
hasn't always played by the rules, but when it has gone after a market,
it has done so quickly and aggressively. Current and former executives
of companies like Apple, WordPerfect, Lotus, Novell, and of course
Netscape can attest to that.
Like Google, Netscape threatened to sideline Microsoft's operating
system, in its case with the web browser that founder Marc Andreessen
unveiled in 1994. The reason was that the browser, which cost each user
$39.95, would enable applications like word processors and spreadsheets
to reside on centralized Internet servers rather than on the hard
drives of users' desktops. That in turn would lessen their need for Windows or
Office, sapping Microsoft's business. But Gates rallied Microsoft to
develop its own browser, which it then bundled free with Windows.
Netscape's market share collapsed, and the upstart was forced to sell
to AOL (like FORTUNE's publisher, a unit of Time Warner) three years
later.
Trying to build a Google killer, however, has turned out to be truly
humbling for Microsoft. The effort has taken longer, cost more money,
and exposed more big-company problems at Microsoft than anyone
imagined. As Payne predicted, targeted online advertising has indeed become a
gold mine. Still in its infancy, it's one of the hottest sectors in high
tech, a $5-billion-a-year market growing at some 40% annually. Yet no
matter what Payne and his crew do, Google and Yahoo seem to do better.
"I remember when [Payne's team] showed off their first prototype in
early 2004--people laughed because it was so much like Google," says a
former Microsoft executive. "We had copied them. That's not how you
lead."
A headache for Payne is that Microsoft isn't as nimble as smaller,
younger rivals like Google and Yahoo. For example, at Google, engineers
are responsible for the software that they write-- period. They don't
hand it off to a "system operations" team to deal with bugs. When
something goes awry, the team that wrote the software and knows it best
is responsible for fixing it.
The bureaucracy and even Gates himself have gotten in Payne's way.
Underdog has been slowed by turf battles within MSN and among the
company's six other business units. Microsoft executives' compensation
is based on the success of their own organizations, which means, says a
former exec, that every interaction Payne's team has with, say, the
Windows business unit comes with strings attached. Payne and his team
have tried to speed development by buying their way into the search
game, but something has always thwarted that approach. In spring 2003,
Payne pitched Gates on buying Overture, a move that would have given
Microsoft search engine technology out of AltaVista as well as an
advertising business that was generating huge profits. But Gates shot
the plan down, convinced that Microsoft could do a better job for less
money on its own. Instead, Yahoo bought Overture, a move that, together
with its earlier purchase of Inktomi, enabled it to catapult itself
successfully into the search game in a year.
In fall 2003, Microsoft briefly considered buying Google, only to
realize that even if Brin, Page, and their board could have been
persuaded to sell--which seemed unlikely--Microsoft would have been
left to explain to the world why it was now running a search engine built
entirely on Linux instead of Windows. Even when it did buy a
company--Lookout--in June 2004 (Lookout had mastered fast Outlook e-
mail search), it didn't move quickly enough to expand the software to
search the whole desktop.
The price for being slow-footed became abundantly clear last fall:
Google beat Microsoft to market with desktop-search software by two
months. The news ripped through Microsoft with titanic force. Everyone
from Gates on down scrambled into meetings to assess how good Google's
product was. Not especially, they decided. Even so, it dealt a blow to
their pride. "Here Microsoft was spending $600 million a year in R&D
for MSN, $1 billion a year for Office, and $1 billion a year for Windows,
and Google gets desktop search out before us? It was a real wake-up
call," says an exec. "It was the first time many people in the
corporation understood that Google was more than just a search engine.
People said, 'If they can do desktop search, what prevents them from
doing a version of Excel, PowerPoint, or Word, or buying Star Office
[from Sun Microsystems]?' "
What does Google make of Microsoft's growing animosity and paranoia?
Although neither the co-founders nor CEO Schmidt would comment for this
story, Schmidt told an audience of Internet pioneers at UCLA last fall,
"One of the criticisms that the media makes is to compare Google to
previous-generation companies. Google is trying to solve the next
problem, not the last problem." Privately, Google's executives
understand exactly the impact they are having on Gates and his team.
They project a carefree image in part because it makes business sense.
One blunder by Netscape was that it let Andreessen tell the world how
he intended to put Microsoft out of business. Count on Google not to
repeat that mistake.
Remember, many of the most influential people at Google are hardened
Microsoft warriors. Schmidt battled Gates as CTO of Sun Microsystems
and CEO of Novell in the 1990s. Omid Kordestani, Google's head of ad sales,
was a top executive at Netscape. Three of Google's directors, Ram
Shriram, John Doerr, and Michael Moritz, have been on the front lines
of Silicon Valley's war with Microsoft over the years. "Microsoft can
literally spend a billion dollars on this if they choose. We take them
very seriously," says a Google executive. One reason Google has been
rolling out so many new or improved products is that Schmidt
understands that innovation is the only sure edge Google has. The moment Google
allows itself to slow, Microsoft could overwhelm it.
FOR ANYONE WHO HAS BEEN WATCHING GATES OVER THE years, the idea that an
upstart like Google could so flummox him and his fierce company takes
getting used to. But Google is a rival unlike any he has faced in a
long time.
In previous battles, Microsoft always had a powerful trump card:
It controlled the Windows operating system. That meant that when
consumers bought a PC, Microsoft had a powerful say in what products
and services they saw first. It had pricing power and distribution power
over competitors. Because of that, its applications didn't have to be
superior to those of the competition- -just roughly equal. Windows
wasn't better than the Macintosh; Word didn't improve on WordPerfect,
or Excel on Lotus. Even Explorer was only as good as Netscape. Microsoft's
genius was integrating them seamlessly to make them easier for
customers to default to, and then using its marketing, distribution, and pricing
clout. It won by attacking competitors' business models, not their
technology.
Microsoft's array of weapons has so far proved next to useless against
Google. For one thing, any attempt to bundle search with its products
will probably be scrutinized by antitrust regulators. Meanwhile, you no
longer need a PC to use Google--it works fine from a Treo, a
BlackBerry, a cellphone, a television, an Apple, or a Linux computer--any device
with some kind of keyboard and Internet access. Nor can Microsoft
undercut the price of Google software as it did with Netscape: Google
is already free. There's no quick and easy way to lure away Google's
online advertisers either. They pay based on the price of a keyword in a
search and on how many times users click on the ad, but Google doesn't control
that--it's set by auction.
Says a former Microsoft executive:
"Microsoft can play its old game to compete with Linux and Apple. It has to play
Google's game to compete with Google."
Gates and Payne don't agree at all. To them, beating Google is the same
as beating any of Microsoft's previous challengers. It's still about
writing software that is easier to use, and the easiest- to-use
software is always the kind that's integrated with what people already
have--like Windows or MSN. Gates says that when Microsoft is done integrating
search into future versions of Windows and Office, the world will look
back at the way we are now "Googling" for stuff on the Internet and
laugh. "The idea that you type in these words [in the search box] that
aren't sentences and you don't get any answers--you just get back all
these things you have to click on--that is so antiquated," he says,
later adding, "We need to take search way beyond how people think of it
today and just have it be naturally available, based on the task they
want to do." For example, if you wanted to look up a factoid while you
were writing a document, you might search for it without ever leaving
Word.
Perhaps Gates is right--again. After all, Google may be hugely
profitable and a Wall Street darling, but it is also a young company,
largely controlled by its founders and dealing with the unavoidable
pains of torrid growth. Oddsmakers would say the likelihood of its
stumbling is high, and no one is better at outlasting the competition
than Gates. Certainly the search game is still in its infancy. Only a
fraction of the content available online is actually searchable. For
instance, even subscribers can't search current and archived issues of
the Wall Street Journal or most other publications with a search
engine; you have to go to the publication's site. This suggests that the search
engine that can get the world to list premium content on its platform
will have a leg up on the competition.
Microsoft has plenty of money to buy the rights to such content; it also owns powerful digital-rights- management software, which helps copyright holders control who uses
their products and how often. Those should be advantages in negotiations with companies worried about losing control of copyrighted text, music, and video on the Net.
Another advantage for Gates & Co. is that search engines are still
technologically primitive. They can't understand context, for example;
if you type "chip," they can't tell whether you are looking for a snack
food or high-tech equipment. As a result all three big search engines
are scrambling to find ways to make search more personalized. The
thinking is that the more a search engine knows about who is searching,
the more accurate the results will be. Each company has the foundations
of such a product in its desktop-search software, which can tell what
you have on your hard drive. Perhaps Microsoft, because it understands
Windows better than any other company, will be able to offer faster,
more accurate searches.
All the same, Microsoft is taking longer to catch Google than anyone
could have imagined--and it will take longer still. Unless it can
deliver search that is plainly better, most users won't bother to
switch, says Piper Jaffray analyst Safa Rashtchy. He adds, "Google is a
huge brand. From where I sit, it's their game to lose." The competition
could well test Gates' patience as never before. In spring 2003 he told
one of his executives, "These Google guys, they want to be billionaires
and rock stars and go to conferences and all that. Let's see if they
still want to run the business in two or three years." Well, two years
have passed, and so far, they sure do. ?
FEEDBACK
fvogelstein@fortunemail.com"They are a software company," says Gates. "They are more like us than
anyone else we have ever competed with.""Here Microsoft was spending
billions on R&D, and Google gets desktop search out before us? It was a
real wakeup call."Building a Google killer has turned out to be
humbling for Microsoft. It's taken longer and cost more money than anyone
imagined.Gates says when Microsoft's done integrating search, the world
will look back at the way we "Google" for stuff and laugh.
