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Gartner: Microsoft after Google's advertising jugular

Yahoo deal happening or not, Microsoft is going after Google's core business: online advertising. That, in turn, is a step along the way to the rivals' true destiny. Hollywood, here they come.

The battle between Microsoft and Google Inc. took a lively turn last week, when reports surfaced and then were quickly batted down that Microsoft was once again in merger talks with search firm Yahoo Inc.

Whether the discussions are happening or not, any doubts that Microsoft -- not Google -- is the company on the offensive can be dismissed, said David Mitchell Smith, an analyst at Gartner Inc. in Stamford, Conn.

"Microsoft is clearly going after Google's core business, advertising," Smith said. "Google is trying to distract Microsoft, so a company with its resources can't apply 100% of its focus on the attack."

The chatter in recent months has been that Google is going after Microsoft where it hurts -- in the realm of work. Last year's acquisition of Writely by Google shows that office applications -- albeit Web-based, free and available at the click of a mouse -- are of interest to the Mountain View, Calif.-based search engine firm.

But Google Docs & Spreadsheets is simply another venue for Google's customers to put their ad dollars, Smith said. Yes, the product offerings allow Google to exploit its low-cost, highly scalable architecture and pick off the "low-hanging fruit" in the enterprise market. But Google has no illusions about busting up the Microsoft monopoly on corporate IT budgets, he stressed.

Allen Weiner, who covers Google for Gartner, agrees that the online advertising market is "up for grabs," and that it is where the money is. Microsoft and Google are the most celebrated among the many players, including Sunnyvale, Calif.-based Yahoo, that are vying for this space, Weiner noted. The question, he said, is will the battle end with one loser and one winner -- and, if so, what does that mean for how companies and consumers do business?

Smith and Weiner teamed up at Gartner's Symposium/ITxpo in San Francisco (a week before the Yahoo rumors) to give their analysis of the two competitors, outlining the good, the bad and the areas where they compete. For the record: Both predict Yahoo will partner in some fashion with someone -- but that could just as easily be a telecom service provider, such as Verizon Communications Inc. or AT&T, as Microsoft.

The missing link

To say that Microsoft is dead, a common refrain in the blogosphere, is "absolutely ridiculous," Smith said. But there is no doubt that Microsoft is at a "critical point in its life."

The company's core Windows and Office businesses still generate the lion's share of the profits. But with the exception of its growing and profitable servers and tools business, sales at most of Microsoft's other many businesses are flat or losing money, Smith said.

But change is afoot. With the retreat of Bill Gates and the ascension of Ray Ozzie as chief software architect, Smith said, plus "a whole lot of soul-searching" about how to compete in Web 2.0, any assumptions about Microsoft must be revisited.

Microsoft's deal with Novell Inc. around open source and Linux gained momentum just this week with the announcement that Dell was joining the collaboration. The launch of Windows Live parts and services that work just as well on operating systems and browsers other than Microsoft's is another change. Microsoft also announced deals with Volvo Car Corp. and Chivas Brothers Ltd. to advertise on two new Web-only TV shows that will air on its MSN Web site. The two shows are from Reveille, the producer of TV hits The Office and Ugly Betty.

But the company has struggled to capitalize on -- or even clearly define -- its Live Web services, the area, after all, where it is trying to go head to head with Google, Smith said.

Part of that failure can be chalked up to getting the Vista operating system and Microsoft Office 2007 out the door, Smith said. But the company must do a better job marketing Live -- and its relation to MSN. The real challenge for Microsoft is exploiting the platform angle of Live.

"When you look at what makes the company tick, when you look at what Microsoft thinks about when it makes very strategic decisions, it all revolves around the concept of a platform," Smith said. The company builds something that is "reasonably general purpose," so an ecosystem, with a life of its own, can evolve around it.

Not afraid to fail

If Google is not going after Microsoft's predominance in the office suite, what is the titan of search reaching for? The brass ring, Gartner's Weiner said -- it wants to be the Internet media giant.

The beauty of Google has been the simplicity of its mission, Weiner said. Simply put, that mission is searching and indexing all the world's content and monetizing it. Google is first and foremost an online advertising engine, Weiner said.

The biggest issue for Google, is Google itself.

David Mitchell Smith, analyst, Gartner Inc.

Now, Google is looking to get into offline advertising. Last year's $1 billion purchase of dMarc Broadcasting in Newport Beach, Calif., set the stage for Google Audio Ads, its vehicle for putting ads into radio streams. The company has announced multiyear deals with Clear Channel Communications Inc., the country's largest broadcaster, to deliver ads, and with television broadcaster EchoStar Satellite LLC.

"The question remains, will Google be a player in mainstream video," Weiner said. But he predicts that some time this year, Google will form a relationship that brings its search power and its end-to-end advertising platform together with an entity that delivers television and television-like content. "That's a helluva combination," Weiner said.

Google's company culture allows it to evolve more quickly than competitors, he added.

Unlike the changing of the guard at Microsoft, Google has clear leadership in co-founders Sergey Brin, Larry Page and CEO Eric Schmidt, Weiner said, adding that until recently the trio were in on every job interview at the company. Under their watch, Google has become the land of milk and honey (OK, sushi and espresso) for young technorati, and was coronated by Fortune Magazine as the top place to work.

The company is not afraid to spend money, as demonstrated by beating Microsoft to the punch on DoubleClick Inc. and its controversial purchase of YouTube Inc.

In addition, creativity rules, literally. Engineers can give 20% of their time to develop something new -- hence the endless list of Google products. Many don't stick, but that may not matter, Weiner said. "Google is not afraid to fail."

The company is not without shortcomings. The lack of work in rich media search "has to be called out," Weiner said. Google also has not done a great job managing its image outside the U.S. Europe sees the king of search as more a bully than a bully pulpit for the consumer, Weiner said. And it remains to be seen whether the acquisition of DoubleClick, whose big (obnoxious) banner ads are the antithesis of the Google aesthetic, will cause a backlash. Google must be vigilant about controlling its iconic brand. "The biggest issue for Google, is Google itself," Smith said.

Who will prevail? Microsoft is notorious for stopping short of the finish line, the Gartner analysts agreed, as it did with Media Center, a vehicle that offered the possibility of consuming media anywhere. If Microsoft hopes to catch up with Google in search, it will have to clear up the confusion between Live and MSN. To gain market share, Microsoft will need a "killer" product to change minds.

But Microsoft has the arsenal -- the technology, the channels to display content, and a soapbox with Live -- to become a powerful media company, Smith said. It lacks a cohesive strategy to make the pieces make sense. The company needs a visionary to put together the pieces. "It's a personnel issue," Smith said. "What Bill Gates did for the desktop, the new czar must do for the Web."

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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