A Beautiful Mind: Microsoft over Google

There is an Oscar winning film directed by Ron Howard, titled "A Beautiful Mind," where mathematician John Nash develops his Nobel Prize winning game theory. It seems Microsoft may have taken a page out of the game theory playbook as it is developing an alternative competitive strategy that will eventually help Microsoft crush Google.

Bill Gates (founder and Chairman of Microsoft) recently spoke at the University of Chicago, and I was most interested in two of the themes in his presentation. One, Mr. Gates emphasized the huge opportunities in the poorest two thirds of the World which are largely ignored today. Two, he discussed the development of new natural user interface tools (e.g. touch screens, pens, speech recognition, and cameras) that will eventually become as much a part of Internet life as the mouse and keyboard are today. I believe it is these two themes that will allow Microsoft to capture enough data and Internet traffic to eventually develop a search engine that will dethrone Google.

In terms of search engines, Google is currently number one with more U.S. and International traffic than any other search provider. Google has gained a competitive advantage in the Internet search space due largely to the massive amounts of data it has collected and continuously uses to improve its search engine. (granted, Google's search algorithms and programmers are amazing too, but these are things that can be copied by anyone with enough dollars, whereas Google probably won't ever sell their proprietary data). It seems nearly impossible for a competing search engine to ever catch up to Google. It would take years for a competitor to gather an equivalent amount of data, and by that time, Google will have already advanced further. Here is where John Nash and game theory comes in...

Rather than choosing to compete with Google head to head, Microsoft has chosen an alternative strategy that would make John Nash proud. Microsoft aspires to develop a set of user interface tools that will revolutionize the Internet in much the same way that Windows revolutionized personal computing. Internet users will freely choose to access Internet data via Microsoft over Google because the Microsoft solution will simply be so much better.

Further, Microsoft will tap into the ingenuity and information of the poorest two thirds of the world which is already demonstrating its massive desire and aptitude to be productive (check out page 9, paragraphs 5-7, of this Bill Gates presentation for an example of the poorest two thirds demonstrating phenomenal promise). As I've written before (Why I sold Google at $741), Google has already demonstrated fear of flattening revenue growth due to key Word prices inflating to breakeven levels for advertisers. Two of Google's latest attempts to combat this fear are Open Social and Android. Both are truly genius ideas, but I still like the Microsoft strategy better because it is so much bigger.

In the short term, Google shares look attractive because of it's increasing market share lead, superior search engine, and attractive valuation (market cap has dropped approximately 1/3 since November and price/earnings ratios are below historical ranges), whereas Microsoft will likely face challenges with the bidding for, and eventually integration of, Yahoo. However, if I had to pick one of the two companies to own over the long term, I'd pick Microsoft because it is positioning itself for much bigger rewards. After all, even Warren Buffett has so much faith in the abilities of Bill Gates that he bequeathed over $30 billion of his fortune to the Bill & Melinda Gates Foundation.

Comments

[reader:]

Interesting take on the subject. I do wonder, however how long do you think this evolution will take? Mr. Softy has been a real dullard for a number of years in terms of its share price. Its dividend has not moved either. A person could starve to death waiting for a price increase or any other decent return form this company. Further insite would be appreciated.

2008 Feb 25 08:13 AM

[wall street...:]

Is this a joke ? Microsoft and new user interfaces ? Did this guy ever use any MSFT products that try to innovate .....
> the train wreck called Vista,
> the revolutionary simple interfaced called Bob,
> the future of home internet called WebTV,
> the ultra portable platform called Origami,
> the personal portable watch device called Spot
> and the best of all....the hand gesture interface of the future called Surface PC (its a friggin normal PC with a bunch of jerry-rigged cameras under the glass and they still can't ship it)

So the idea here is that MSFT's user interface capability will allow it trump Google in search. Man, thanks for the laugh this morning.

2008 Feb 25 08:18 AM

[Tom B:]

I second Wall Street Guy. All the interesting interface work-- ALL of it-- is happening in Cupertino. The iPhone-- gateway to the TRUE mobile web. The "touch" interface. And all the programming talent that ISN'T at Apple seems to be Google. All I hear from MSFT is how many bargain-basement coding "sweatshops" they are opening in China.

2008 Feb 25 08:56 AM

[Jim Meidel:]

Mr. Hines, There is no Nobel Prize for Mathematics and never was. The movie, "A Beautiful Mind" insinuated otherwise. Hollywood creates its own version of reality, which the public too readily accepts as fact.

2008 Feb 25 09:14 AM

[Tom B:]

"Hollywood creates its own version of reality, which the public too readily accepts as fact."

So does the business press. There is clearly a HUGE amount of manipulation going on these days-- many are beating up on Apple. Funny, HP actually went UP when THEY had a good quarter-- fancy that! And the MSFT-Yahoo thing. Every smart analyst understands that this is doom for both companies, yet there's lots of "astroturf" commentary out there pushing the deal. You'd think we were in an election year or something [joke].

2008 Feb 25 09:24 AM

[GVWonder:]

I 100% agree with Wall Street Guy, but would add the following. Mark said:

"Google's search algorithms and programmers are amazing too, but these are things that can be copied by anyone with enough dollars"

If MSFT's $40+bn in cash and 24,000 engineers cannot unseat Google's dominance in the past 8 years, you are wildly underestimating the power of people and culture. It's not the proprietary data, it's the people who conceive, gather and analyze it.

The exact strategy you propose of expanding the size of the pie wasn't conceived (and won't be won) by MSFT. Yes, there's untapped value and market share in poorest 2/3's of the world, but let's face it, search and internet ads don't even move the needle for MSFT in terms of revenue, PC/server OS's and Office do. So, is MSFT going to give away the crown jewels of OS and Office to the poorest? Not a chance. And even if they did, how would they monetize it? Good luck up-selling a Bangladeshi kid using a restricted copy of Windows to Vista. MSFT has the same problem the pharmaceutical industry has - yeah, there's a huge market for Viagra in sub-Saharan Africa, but not at $4USD a pill.

Google's already in the business of giving away premium internet services for free to expand the pie they can monetize - blogger, customized search engines, Gmail, documents, business accounts, Open Social, Android, and eventually cloud computing, etc. Free equalizes the game internationally. MSFT, YHOO and AOL all try and nickle and dime users for premium internet services for a trickle of short term revenue but ultimately a losing long term strategy. As Google extends developers' reach into their services with strong, intuitive, open and free API's, they are in the prime position to be at the forefront of the next creative wave to expand the size of the internet pie, then capture, analyze and monetize it. Google's Nash-approved strategy is intent upon giving away more of what everyone else charges for as they are already best aligned to earn from it.

So, the Evil Empire of old came pre-installed (MSFT), but the new Evil Empire comes bearing free gifts (GOOG). ;-)

2008 Feb 25 09:51 AM

[CliffA42:]

While both companies boast their share of arrogance, Microsoft wins that prize by a country mile. It is not customer-friendly at all, and that culture will undercut any alternative technology to which it aspires.

At this point, Google is the better investment, and will be for the next decade.

2008 Feb 25 10:56 AM

[aleax:]

Jim Meidel: there is a Nobel _Memorial_ Prize in Economics (not quite the same thing as the Nobel Prizes proper, as the money does not come from Nobel's estate, but nobody draws the distinction...!-), and that's what Nash won; where does the movie "insinuate otherwise"?

2008 Feb 25 11:02 AM

[User 155657:]

"Microsoft aspires to develop a set of user interface tools that will revolutionize the Internet in much the same way that Windows revolutionized personal computing. Internet users will freely choose to access Internet data via Microsoft over Google because the Microsoft solution will simply be so much better."

I mean where do you start with this comment? Google already invented the interface tools that will revolutionize the internet. This post may have been interesting in 1999, but this race has been over for awhile man.

2008 Feb 25 12:24 PM

[globalmacro:]

Interesting analysis. I was buying a little of it until you made the comment at the end about Warren Buffett which completely blew all sense of credibility. I know this might have been an off-handed comment but I think Warren Buffett would chastize you for saying that this 30B donation to the Bill and Melinda Gates Foundation was some sort of endorsement of Micrsoft as a business. It was clearly more an endorsement of the Bill and Melinda, not of the company. If you asked him directly, he would probably laugh at you. Microsoft's best years are behind it and Bill Gates has chosen to spend the vast majority of this time with his charity. Buffett can bet on that and THAT is why he is giving his money to his charity.

2008 Feb 25 12:27 PM

[grishick:]

Well... well.. well.. let me remind you how it usually works. Someone (like Apple) comes up with a really innovative idea that will revolutionize the industry, then Microsoft steals it and claims to be the innovator. As "wall street guy" pointed out, MS's own attempts to innovate so far failed.

2008 Feb 25 12:39 PM

[oceandude:]

The article's idea is laughable. It assumes Microsoft can actually make *brand new* things that consumers want.

Could someone please tell me what great new stuff Microsoft has released in the last 10 years? Perpetual derivatives of Windows and Office don't count.

2008 Feb 25 03:15 PM

[Roggg:]

1) Article lacks any substance whatsoever. It seems to be based on marketing rather than objective data or experience.

2) You didn't sell GOOG at $741. At least, you didn't write about it then. You're just claiming that now, after the fact, in snake-oil salesman fashion.

3) Looking at the recommendations you *have* made that have been tracked by this blog... you're a clown. Shut up.

2008 Feb 25 03:21 PM

[jfc:]

so what is happening to GOOG?? why does the price keep falling?

2008 Feb 25 04:37 PM

[.crazylegs..:]

how does a new natural user interface tool translate into msft being able "to capture enough data and Internet traffic to eventually develop a search engine that will dethrone Google."??? and when does this play out??? before or after windows 7 in 2011?

the hope that msft can create something innovative to beat google is a far fetched notion at this point. this is one of those articles that should stay in the theoretical world. good sale on goog at $740 though.

2008 Feb 25 04:38 PM

[Ray Lopez:]

I have to agree with Roggg--this article was all fluff and no substance. And I'm a MSFT shareholder.

2008 Feb 25 06:01 PM

[User 120461:]

There are doctors available for patients who happened to muster out words similar to these. I am too busy charting where the S&P 500 is about to break out from, but notice, this article is about to redefine what we for centuries consider as coherent analysis of our reality.
I think, forget Oscars, you my friends has cornered America into an sandwich stand with this boar-seeking-but-not-f... introduction to insanity. But how can I not love it, when I actually do?

2008 Feb 26 03:20 AM

[David.Monte...:]

Mr. Hines,
Despite your strange and irregular thought patterns, I actually enjoyed reading this very much. I'm still not sure if you are insane or if you are a genious, but thanks for posting.

2008 Feb 26 03:48 AM

[AQR:]

I disagree with Roggg, et al. Sometimes it's not just about the financials (they're all are all backward-looking anyway). This is a brilliant allusion to Nash equilibrium, and a very enjoyable read.

2008 Feb 26 09:35 PM

[seriously ?:]

with all due respect,
my brain just exploded.

"Microsoft aspires to develop a set of user interface tools that will revolutionize the Internet in much the same way that Windows revolutionized personal computing"

Have your heard of ANDROID, or the iPhone or its SDK ?

Google and Apple are miles ahead of MS in this exact space. The fact that we are talking about microsoft "aspiring" to develop these technologies should be reason enough to stick a fork in them.

This has been GOOGs business model from day one. Unless there is reason to believe to that MS can develop an Iphone or search engine infrastructure that rivals GOOG, then they simply will not ever catch them.

They are already playing catch up in the most ruthless of sectors where one shift in technology can kill you. Remind the last product that MS produced that wasn't a joke.

and if you say Xbox 360, I will gladly ask you how much money the Xbox has made for MS.

2008 Mar 12 01:36 PM