Mr. Gates, the Microsoft co-founder and chairman, paused, looked down at his folded hands and smiled broadly, as if enjoying a private joke. "Nah," he replied, "we'll do something different."And what would that something different be? The article goes on to suggest that it will be web services, but I think it will be going after Google's lifeblood, advertising.
Geeks like me think of Google as a search company, but most biz folks I talk to view Google as an advertising company. It is the ads that generate the revenue. It is the ads that allow everything else to happen.
The AdSense revenues -- revenues from ads placed on other sites -- may be particularly vulnerable to attack. This was 43% of Google's revenue in Q3 2005. With these ads, the owner of the site gets roughly 70% of the revenue from the ad. Google takes the other 30%.
It seems like Microsoft could do a fair amount of damage here by trying to drive the share the advertising engine takes in this deal to near zero. To do that, it just needs to launch its own AdSense-like product and be willing to set its take to its breakeven point.
There's some indications that Microsoft may be planning to do this. Bill Gates pointed out that Google makes a lot of money from advertising and then scolded Google for keeping all of the advertising money for itself. Nicholas Carr recently wrote that "the wide profit margins Google enjoys on internet advertising are unsustainable" and "competition, from Yahoo and Microsoft as well as others, can be expected to reduce the profits." And MSN just announced a pilot of an AdSense-like product called AdCenter.
However, there is a big assumption here, that other advertising engines can generate the same revenue as AdSense. As long as Google's clickthrough rates are roughly 30% higher, it will be impossible for anyone else to drive Google's share of the revenue to zero.
And that is Google's defense. Focus on relevance. If Google can maintain its lead on relevance, if it can maintain higher clickthrough rates, if it can continue to generate more revenue for sites using AdSense, it is not vulnerable.
See also "Kill Google, Vol. 1" where I focus on the dangers of from growing too fast and from failing to innovate quickly.
See also "Kill eBay, Vol. 1" and "Kill eBay, Vol. 2".
Update: After the March 2006 analyst day, Google posted slides that said in the notes:
AdSense margins will be squeezed in 2006 and beyond. Y! and MSN will do un-economic things to grow share.Google expects Yahoo and Microsoft to attack them using this strategy.