The online arms race has officially begun.
What Google does best is to "deliver innovation at scale," solving difficult problems for a global user base. While Google has been quietly investing huge sums in building out their massive infrastructure, Microsoft has been busy doing what they do best -- developing desktop software, marketing and throwing chairs.
Despite vicious threats to "f***ing kill Google," it seems that Microsoft is just now waking up to the reality that to kill Google in the market for online services, Microsoft will need something it surprisingly doesn't have -- scale. So Ray Ozzie promises to spend "staggering amounts of money" to build out Microsoft's data centers and to develop a "Live Drive" to compete with Google's rumored Gdrive or Google Grid.
Unfortunately for Microsoft, which is losing money in MSN and seeing revenue and market share fall year-over-year, it really will take staggering amounts of cash to catch up. This reality dawned on Microsoft investors this morning, who sold Microsoft stock en masse after Microsoft announced they would be investing another $2 billion to build out their online services infrastructure.
Microsoft stock is down this morning more than 11% - losing $30 billion in market capitalization - which is a much more staggering amount of money than the $2 billion Microsoft will invest this year in MSN. Maybe investors are not only worried about a money pit of investment weighing down future earnings, but they also wonder whether Microsoft can ever catch up with Google just by writing big checks.
A Wall Street Journal article this morning (sub req'd) quotes a Goldman analyst saying that Microsoft spending is "snowballing," while another analyst wonders if Microsoft's investments "will be a fruitful exercise or a dog chasing its tail."
With $35 billion in the bank, Microsoft certainly has the cash to win the arms race. But it's doubtful that Microsoft has the know-how, at least not today. Google has already built out out a global, distributed computing infrastructure that gets a lot of bang for every buck. And Google's engineers have built a company around online information services, while Microsoft's engineers have built a company around personal desktop software.
In short, Google has a huge head start. If Google keeps going fast, Microsoft can't catch up just by spending a lot of money.
For smaller competitors like Yahoo, eBay and Amazon, it's increasingly clear that none of them has the resources to participate in this arms race. For them, consolidation is coming. Let's hope Google participates in the consolidation, and uses its own cash hoard to deny critical capabilities to the competition.
