This battle of the titans has been brewing for 5 years or more. It is inevitable. Not because of animosity between the companies, but because of underlying business and technology trends driven by new customers and technology advances. There are lots of examples of this happening in many different industries. Think Toyota vs. Ford 30 years ago, or Microsoft vs. IBM.
The New York Times has a story today "Google Gets Ready To Rumble With Microsoft". The NYT interviews Google CEO Eric Schmidt, and one quote sums up the Google view that the future of computing is web based applications and services hosted in "the cloud" on the web.
To explain, Mr. Schmidt steps up to a white board. He draws a rectangle and rattles off a list of things that can be done in the Web-based cloud, and he notes that this list is expanding as Internet connection speeds become faster and Internet software improves. In a sliver of the rectangle, about 10 percent, he marks off what can’t be done in the cloud, like high-end graphics processing. So, in Google’s thinking, will 90 percent of computing eventually reside in the cloud?
“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”
Jeff Raikes, President of Microsoft's Business Division, responds by saying;
“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,” says Jeff Raikes, president of Microsoft’s business division, which includes the Office products. TO Mr. Raikes, the company’s third-longest-serving executive, after Mr. Gates and Mr. Ballmer, the Google challenge is an attack on Microsoft that is both misguided and arrogant. “The focus is on competitive self-interest; it’s on trying to undermine Microsoft, rather than what customers want to do,” he says.
Henry Blodget, former Wall Street analyst and currently of Silicon Alley Insider, casts the debate as the classic "Innovators Dilemma", made famous by Harvard's Clayton Christensen. Henry distills the essence of 'The Innovators Dilemma" and the situation between Google and Microsoft in a few short paragraphs;
Disruptive technologies do not destroy existing market leaders overnight. They do not get adopted by the entire market at the same time. They do not initially seem to be "better" products (in fact, in the early going, they are often distinctly "worse.") They are not initially a viable option for mainstream users. They do not win head-to-head feature tests. Initially, they do not even seem to be a threat.
Disruptive technologies begin by providing a cheaper, more convenient, simpler solution that meets the needs of the low-end of the market. Low-end users don't need all the features in the Incumbent's product, so they rapidly adopt the simpler solution. Meanwhile, the Incumbent canvasses its mainstream customers, reassures itself that they want the feature-rich products, and dismisses the Disruptor as a niche player in an undesirable market segment.
But then the Disruptor improves its products, adding more features while keeping the convenience and low cost. Now the product appeals to more mainstream users, who adopt it not because it's "better" but because it's simpler and cheaper. Seeing this, the Incumbent continues adding ever more features and functionality to its core product to try to maintain its value proposition for higher end customers. And so on. Eventually, the Incumbent's product overshoots the needs of the mass market, the Disruptor grabs the mainstream customers, and, lo and behold, the technology has been "disrupted."
It is important to remember that Microsoft has played the role of "Disruptor" in the past, and learned a lot along the way. Jeff Raikes and Ray Ozzie totally get it. The people in charge of Office and Live get it. .
Microsoft has a carefully planned strategy to provide customers with the best of both worlds; packaged software for applications that require lots of graphics and computing power, complimented by web based services for easy access and group collaboration. Microsoft calls this "Software plus Services", and it is important because the user experience is seamless and synchronized no matter where you are. Microsoft has invested billions in huge data centers to support this vision.
On the business side there is another delicate balance. Microsoft Office is a $15 Billion dollar business. Balancing that business with advertising supported web services, or monthly subscriptions, will happen gradually over time.
Another important thing to remember is that this isn't a "winner take all" scenario. This is a huge market and there is room for different solutions and business models. Look at IBM. They are still a very large and successful company 30 years after they were "disrupted" by Microsoft.
Ultimately the customers decide who wins. Great companies adapt to changes in the marketplace. Lazy companies cling to their "tried and true" business models in the face of disruptive forces. Microsoft is a great company...so is Google. Both will be successful in their own way...and the customer wins either way. That is the American way!