At the "D4 - All Things Digital" conference, Microsoft CEO Bill Gates was put on the spot by Walt Mossberg and had to defend the company's lackluster results in the search business. Give us time, he declared. It's a message that resonates with Microsoft watchers, who have seen the company come from behind time and again. Marketwatch gives a summary of his talk.
More disturbing is Gates's claim that "Google has done less innovation than I would have expected a year ago." That's what killed off most of Microsoft's competitors in the past. They gave Microsoft the chance to catch up. And Google sometimes seems as though it's more interested in creating new products than improving old ones. I still find that Google Desktop has a tendency to miss documents I'm searching for, although the product is still better than Microsoft's. That could be trouble for Google.
Still, Gates could be raising those arguments simply because he knows they resonate with crowds. Microsoft insiders have told me that Gates seems much less involved with his company these days, preferring to spend time with his charitable foundation. He is middle-aged now. As impressive as Steve Ballmer and Ray Ozzie are, Gates has always been Microsoft's biggest asset. Asked about his title of "chief software architect" at D4, Gates responded, "My title is a strange thing. People should think of me as chairman." Well, that title wasn't so strange when he took it. If true, Gates's lessened role could be the biggest threat to Microsoft's future, although I'm sure he would consider that idea random.
But Microsoft is still the biggest threat to Google. As Gates says, the company is patient. It has been written off too frequently in the past.
Still, a monopoly in search is no big deal. Let's face it, that's a $0 billion business. The real issue is where the money lies--in advertising. Google is rapidly becoming a monopoly in that business, enjoying a huge Network Effect that nobody has yet figured out how to combat. Its ad revenues are growing faster than online advertising overall, the fastest-growing form of advertising in the world, increasing 38% from 1Q 2005 to 1Q 2006, when it reached $3.9 billion.
But Google's ad revenues grew even faster. In 1Q 2005, Google accounted for 45% of all online ad revenues, and in 1Q 2006 that rose to 58%. Ballmer is well aware of that fact, and in a recent speech in Silicon Valley, warned against Google's potential monopoly there. "If there's only one advertising marketplace in the world, there's going to be lots of unhappy people," he said.
I can't wait until Microsoft starts complaining to the Justice Dept. about Google's advertising monopoly.