Google's New 'App Engine': Why Microsoft Should be Shaking in Its Boots

A TickerHound member asked:

What do you make of Google’s latest announcement? Is “App Engine” a new business model for Google or is it designed to help them sell more ads?

I’ve been following this situation since Google (GOOG) made the announcement Monday, and I personally think this was Google’s big “power play”. It was the move that Microsoft (MSFT) was worried about for the last four years – here’s why:

When I first heard about Steve Ballmer throwing a chair across a room and screaming (in his typically high-pitched voice) about how he was going to kill Google (all because an employee was leaving), I was perplexed. Why on earth would Microsoft – the king of the desktop – be so scared of a search company?

I couldn’t see it…it was my own fault for not seeing it, but I just couldn’t comprehend what Microsoft saw in Google. All this company did at the time was search through web sites and serve up emails. Where’s the competition?

But over the last few years it’s become painfully clear what Microsoft was scared of all along. I’m impressed that they even had the foresight to see it coming – however, I’m pretty disappointed that they’ve done nothing to stop it. Microsoft saw that Google was trying to become to the web what Microsoft was to the desktop PC.

Let me explain…

In the early days of the personal computer revolution the biggest player in the space was Apple Computer (AAPL). The ubiquitous Macintosh was the only computer you’d find in offices, schools and homes. But out of nowhere that all changed. Within a short period of time there were a myriad of hardware makers producing and shipping PCs all over the world. And the company that made it all possible was none other than Microsoft.

Microsoft did this by building Windows – the first WYSIWYG (What You See Is What You Get) operating system that was NOT “married” to any specific type of hardware (unlike Apple which only let you run Apple operating systems on Apple hardware). By creating an operating system that ran on virtually any machine, Microsoft accomplished two things:

1. They opened up a huge market for hardware makers
2. They opened up a huge market for software makers.

…And ultimately solidified their dominant position in this space for decades to come.

After Windows came to be, independent software vendors could build applications that would work on virtually any hardware platform. This spurred a massive amount of innovation from independent software vendors, which not only helped the other hardware and software companies, but it also helped Microsoft too.

Think about it: if all of the software you use on a day-to-day basis could only run on a Windows machine, then you’d be hard pressed to switch to an Apple, right? And that’s exactly what allowed Microsoft to “win” – they created a positive virtuous cycle:

• If Windows was on more PCs
• then the greater the likelihood software vendors would build their software to run on Windows
• which meant that more hardware manufacturers would have to support windows

And all of this simply meant more sales for Microsoft.

Now let’s talk about who is going to power the “operating system” of the web.

Powering a simple web site is good and all, and it’s easy enough to do. But in order to maintain a world class web operation, it still requires a certain level of sophistication, time and money. Google recognized this and took a page from Microsoft’s playbook.

Monday, at its second annual “Camp Fire” event, Google announced its latest service: Google App Engine.

This service will allow web sites to be hosted right on Google’s servers. Google will provide all of the backend technology – which is usually reserved for the well funded and experienced web sites – such as storage, database management and clustering, failover protection, auto scaling, etc. Basically, anything and everything a world class web application would ever need, Google now provides.

The best way to think of it is by picturing a young athlete who wants to become a world class runner – should he have to build the track and make his own running shoes? No, he should just be able to go to the local track, slip on a pair of Nike’s and hit the ground running. Well, that’s what Google is saying to software developers.

Software developers can now ignore the tedious, time consuming and often expensive task of building out their backend infrastructure and just rely on Google’s.

Google will obviously charge for these services at some point, but the goal for the company is more ambitious than becoming an infrastructure provider:

If these web sites are “married” to Google’s services, then that means more opportunities for Google to display its lucrative advertisements.

In order to sell more copies of Windows, Microsoft knew they’d need all of the hardware and software vendors to be “married” to its platform…Google wants to do the same for the web – have web sites marry themselves to Google’s platform – so it can sell more ads.

In effect, Google is becoming the Operating System of the Web.

Considering Microsoft is willing to pay billions of dollars to acquire Yahoo! (YHOO), it’s clear that online advertising is the battle ground this war will be fought on. And Google just made its power play…

Is this “check” or “check mate”?

Comments

[fxtrader07]

Sorry, I can understand your comparison but I am simply not seeing how goog will achieve a similiar "marriage-effect&... of the msft-magnitude. for corporations that solution may or may not be interesting. however, even if, they will certainly not accept ggo-ads on their homepages. so what's the deal there fopr goog except charging money for the servie as any other provider?
when it somes to private users, i can see that as a possible business model - still, it is nothing truly unique and customers may switch to other providers any time. that's the important distinction between the web and desktops. competetion in the web is far more fierce and advantages very shortlived. if you have them and make money on them, much of that money made will have to go in keeping those advantages - but they still may not last.
perhaps i am too short sighted or do not have enough imagination but i simply don't see it. btw, the same stand ofor web-based office applications. i strongly prefer the security and privacy of my own pc for doing any word, excel or pp-stuff. Those web-based solutions don't cut any ice with me even if i was paid for usign them i would say, no, thank you.

[shair]

I understand all of this.... but do NOT understand why wall street should be terrified?

[shair]

Google has ZERO experiance in enterprise and is a one trick pony. Google is a darling but outside of search has not developed and other business model.

Google is a great company when it comes to search. But they have to prove they can do little more then search.

Google is good at faceless applications but enterpise software buisness is a human interaction noy just computers.

[WayneMulligan]

@shair - I'm not sure why Wall Street should be terrified either...I didn't put that title in here, the fine folks at SeekingAlpha did.

You both raise great points about Google not being an enterprise software provider and the inherent competition in the web. As for the enterprise software issue all I can say is that Amazon isn't an enterprise software provider, but yet their AWS services now get MORE traffic than all of Amazon.com. Google has already done them one better and it's my belief, when it comes to building scalable/developer friendly systems, they'll continue to do so.

As for the rapid adoption of new technologies on the web - you're right fxtrader, that's a HUGE risk to Google and I should've mentioned it in my analysis. It's my belief, however, (and speaking from a bit of experience) that once a company finds a vendor in the infrastructure space that they absolutely love, they don't move unless they absolutely have to. It's tough to build a web application that can scale -- it's even harder to take that off one platform and put it on another. So I think the best strategy for Google would be to LOVE their customers each and every day -- keep building new features, provide great service and support and get as many folks on the system as possible.

Great comments guys, thanks!

-Wayne

[Mac'em X]

Interesting article, but one nit to pick: "The ubiquitous Macintosh was the only computer you’d find in offices, schools and homes."

Not remotely true. Macs were never close to being a majority platform; in its heyday, Apple's share of the US PC market peaked at around 20%, if what I've heard is correct. Always a minority.

(So far. : )

[M.Weinstein,SA Editor]

Hi Wayne, apologies for using that headline - we switched it now to the one you used upon submitting the article.

Sincerely,
Mick Weinstein
Editor in Chief of Seeking Alpha


On Apr 09 08:21 AM WayneMulligan wrote:

> @shair - I'm not sure why Wall Street should be terrified either...I
> didn't put that title in here, the fine folks at SeekingAlpha did.
>
>
> You both raise great points about Google not being an enterprise
> software provider and the inherent competition in the web. As for
> the enterprise software issue all I can say is that Amazon isn't
> an enterprise software provider, but yet their AWS services now get
> MORE traffic than all of Amazon.com. Google has already done them
> one better and it's my belief, when it comes to building scalable/developer
> friendly systems, they'll continue to do so.
>
> As for the rapid adoption of new technologies on the web - you're
> right fxtrader, that's a HUGE risk to Google and I should've mentioned
> it in my analysis. It's my belief, however, (and speaking from a
> bit of experience) that once a company finds a vendor in the infrastructure
> space that they absolutely love, they don't move unless they absolutely
> have to. It's tough to build a web application that can scale --
> it's even harder to take that off one platform and put it on another.
> So I think the best strategy for Google would be to LOVE their customers
> each and every day -- keep building new features, provide great service
> and support and get as many folks on the system as possible.
>
> Great comments guys, thanks!
>
> -Wayne

[WayneMulligan]

No problem Mick, thanks :)

[Macmay]

I do agree that MSFT has reason to worry- MSN is ranked a distant third when in comes to online searches. MSFT's online services business only contributes 5% of total revenues and has only recently started turning a profit. Considering MSFT basically has monopolies in the Server and tools business, and command significant market share in other categories, the Online svcs present the greatest opportunity for growth. MSFT could narrow the gap, and eliminate another potent competitor by acquiring Yahoo, but cannot afford to lose ground to Google. I'm not sure Google's initiatives will yield any positive results, but at least they seem to be working on it. MSFT has reason to worry, because without a major turnaround of their online unit, they may have to pull down the curtain and concentrate on their other sectors. Their entertainment sector is not entirely profitable either. Check out www.microsoft.com/msft...
-good article Wayne!

[113.com]

Yes Microsoft should be terrified. Because GAE is very powerful.