Microsoft Needs to Start Getting Worried

Microsoft either has a short memory or a sharp sense of irony — it's asking the Justice Department to investigate Google's proposed purchase of DoubleClick for possible antitrust violations.

The deal would give Google a large network of advertisers and Web publishers to serve and sell ads to, along with boosting the search giant's banner-ad business, which lags behind a similar service from rival Yahoo.

Microsoft's apprehension is well founded, but perhaps the company should save its strength and resources for the real battle that's looming: the threat from online software applications.

I got a first-hand glimpse of Google's intentions in this space a few years ago, after spending some time with the founders of Picasa.

Back then, Picasa was a standalone, client-based photo manager and was having trouble getting any market traction because of the glut of similar products. But I was intrigued with the visual approach it took to photo management, one similar to that of Apple's iPhoto software.

I was impressed enough to recommend to one of the photo-software companies I was working that it should buy Picasa and incorporate the visual-management features into that company's own client-based photo software.

When I contacted the folks at Picasa about the potential of licensing the technology or buying the company, they told me they might be interested, but were already in discussions with another suitor and would get back to me if it fell through.

Days later I got a call from them and was told that the software had been bought and the company was no longer interested in my proposal. A few weeks later it became public news that Google had bought Picasa.

With this key acquisition, Google started down the path toward providing actual applications online as part of its broader service offerings.

Since then, the company has acquired products for word processing and spreadsheets, and CEO Eric Schmidt recently announced a soon-to-be-released presentation product as well, thanks to Google's acquisition of Tonic Systems.

It has also acquired video-conferencing technology from Sweden-based Marratech and a Wiki-like application from JotSpot.

And of course, Google already has a popular e-mail application in Gmail. I wouldn't be surprised if news were to come out that the company has bought or licensed technologies for project management and online collaboration.

Behind all this is Google's understanding that the future of software lies in Web-based applications.

At the moment, Microsoft does not see these apps as much of a danger, because most of the current Google applications are aimed at consumers instead of enterprise business users, the bread-and-butter audience for Microsoft Office and related business products.

Over time, though, online applications like Google's will become a real threat to Microsoft's Office franchise. Just ask the folks at Seibel.

The Seibel Story

For most of the 1990s, Siebel was the leading supplier of sales force automation (SFA) software, and its offering was strictly a client/server-based product.

But around 1995, a small company named Upshot created an online SFA product that, at first, got attention only from small and midsize companies.

To Upshot's own surprise, its online solution soon started selling to sales divisions inside some very large companies, such as Xerox, which wanted a fast way to get a single sales division up and running on a solid SFA solution.

Then Salesforce.com came out with an even richer solution, and it too found that although its core customers had been midsize companies, the product was starting to attract large enterprise customers who did not want to make the time, money, and IT investment on client/server-based applications such as Siebel's.

But even with Salesforce.com snapping at Siebel's heels, it took Siebel a long time to realize that this online application threat was real.

By then, the company was so far behind it had to buy Upshot in order to compete with Salesforce.com, which was eating into its core business.

Besides the basic Web-versus-client question, two other important issues are cost and revenue — and here again, Microsoft has cause to worry.

Google apps are free and basically ad-supported, although it does have a premium version of Docs and Spreadsheets that can be licensed for $50 a year.

Microsoft Office is still the leading business platform for applications, but it is expensive. And though it sports a lot of great features, it can be overkill for many of the companies that use it.

Revenue from Office stands in the way of the software going Web-based.

Microsoft could follow in Google's footsteps and create online versions of the popular Office tools, but as the current applications bring in a significant part of its revenue, choosing the right time for a total switch to Web-based solutions will be a very tough call.

All the while, Google is free to innovate with apps online and push hard into Microsoft's territory, knowing full well that Redmond will struggle with this issue for quite some time.

Like Salesforce.com, Google does not have to worry about legacy revenues from current applications, so it can afford to be aggressive with online applications of all types, including ones that go after serious business users.

As bandwidth increases and Internet connections become more ubiquitous, it is inevitable that applications of all types will go Web-based.

Given Google's ability to move quickly in this space, Microsoft has a lot more to worry about than Google's proposed acquisition of DoubleClick.

Tim Bajarin is one of the leading analysts working in the technology industry today. You can find out more about his company at www.creativestrategies.com, and you can e-mail him directly at tim@bajarin.com.