Microsoft (NASDAQ:MSFT) has been a monolith in the technology space for decades. They haven't been at the forefront of innovation for quite some time either. They created the Zune after the iPod had already dominated the MP3 market. They created a phone and search engine long after Apple (NASDAQ:AAPL) had carved out the smart phone niche away from the originator Research In Motion (RIMM). The main profitable product Microsoft offers is their Windows operating system. Microsoft doesn't produce computers, but they sell licenses to use the Windows platform to computer manufacturers. This business model promoted stagnation within the company's share price. In fact, Microsoft trades at the same levels it traded at in 1998.
Enter Google (NASDAQ:GOOG) . Google was once the darling of Wall Street because of it's innovation in the search space. Through years of evolving the business model, Google seems to have become complacent. Like Microsoft, Google was late to the tablet game. In fact, Google has slipped to the number three tablet on the market behind Apple and Amazon (NASDAQ:AMZN). Combine that with a rising Samsung (OTC:SSNLF) market share, and a new Barnes and Noble (NYSE:BKS) and Microsoft announcement to partner together on the Nook. Google could very well be staring up from the number five spot in the tablet market in the next year or so.
Then look at the smartphone space. Google's Android OS, like Microsoft's Windows OS, has taken a market share north of 50% of the entire smartphone market. They only receive licensing fees for those phone sales, and not the massive subsidies that providers AT&T (NYSE:T) and Verizon (NYSE:VZ) provide to other companies for their phones. That is a major source of revenue that Google is missing out on without having an exclusive phone. Even the Nexus, Google's first true phone, had to send some of it's profits to the manufacturer HTC (OTC:HTCXF) and now Samsung. This is something Google desperately needs to alter. They can continue to provide licensing rights to other manufacturers, but they need their own wholly owned phone as well.
Just as Microsoft's OS began to face stiff competition, Google's search is starting to see competition as well. While Yahoo (YHOO) isn't really considered a major threat any long, Facebook (NASDAQ:FB) officials have come right out and stated that they are aiming "to destroy Google". That is as good of an indication that Facebook is going to introduce search into their ever expanding business model as you can get. With superior individual knowledge, its hard to see how Facebook won't compete with Google for search.
Google needs to become an innovator again. They have some of the best talent that Silicon Valley has to offer under their corporate flag. They need to be leery of falling into the same trap that Microsoft did during the 2000's, and provide wholly owned products to the consumers. It is the innovators that will win the coming tech war between Microsoft, Apple, Google, Samsung, Amazon, and Facebook. Those who don't innovate will be left on the side of the road.
Disclosure: I am long AAPL.
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