By Carl HoweOn page one of today's Wall Street Journal (sub. req.), Robert Guth and Kevin Delaney report that Google (GOOG) is striking deals with PC makers Dell and HP to preload Google's software on new PCs and configure them to use its search engine. This isn't just talk; Google is actually paying the PC makers for this privilege. And the two largest PC makers are listening. The authors describe the situation eloquently:
PC makers are turning their computers into the equivalent of a supermarket, capable of stocking products made by many companies -- for a price. The idea is similar to the way food companies pay grocers a fee to get space on store shelves and could help shift the balance of power in the software world.
The article estimates that such a move could cost Google more than a billion dollars over three years. So why would the company do it? Google wants to do this because such deals will:
1. Market Google to new PC customers. These hardware deals mean that Google's software and brand will be pitched to consumers as part of the value of a new PC. Most consumers only think of Google as being a search company; this initiative will broaden their brand value.
2. Create alliances with hardware makers. The Original Equipment Manufacturer (OEM) deals that computer manufacturers have with Microsoft and Intel weren't much of a factor when PCs sold for $3,000. But with PCs now selling for $300, they are huge components of cost, leaving PC manufacturers desperate for profitable add-ons. By becoming a source of revenue for PC manufacturers, Google is building relationships that will pay off for years to come, especially should Google want to expand its hardware offerings.
3. Undercut Microsoft's monopoly power and business. Two engines power Microsoft's seemingly unlimited war chest to compete with Google: Windows and Office. It hasn't had to defend these franchises for nearly a decade, as is evidenced by the fact it hasn't released a new version of Windows in five years. Its Windows franchise is kept afloat by its secret contracts with OEMs, where prices tend to stay high because there are few competing solutions. But once Google starts to replace pieces of Microsoft's Windows bundle, Microsoft's ability to dictate pricing and terms to the OEMs will decline, opening opportunities for Google Linux and Apple Mac OS X in the future.
This is a huge change. Microsoft's control of the PC startup experience has been absolute for nearly two decades. In fact, it was cited in the Department of Justice's anti-trust case against the software company as one of the sources for its market power. If Google successfully chips away at Microsoft's Windows bundle, it may do what the Department of Justice never could: create real competition in the PC software business. And despite Microsoft's constant protestations otherwise, consumers and innovation would benefit.