Why Google is Not the New Microsoft

Tim Bajarin / May 24th, 2013

My history with the PC industry is very long. I got to work on the original IBM PC with Don Estridge’s team in Boca Raton and saw up close and personal how the PC industry developed and how the value creation for the industry came about. I also got to work on early marketing programs for the Mac as well as programs for Compaq, Dell, HP, Toshiba, DEC, and many others as the PC market was hatched and eventually became an almost trillion dollar industry. Perhaps the most interesting fact from the early days of the PC is that IBM created their PC from off the shelf parts and never even considered developing a proprietary design at first. By using an open approach to the PC architecture it did not take long before others created IBM PC clones and took IBM on soon after the IBM PC hit the market in 1981.

Most industry folks know that when IBM sought out an OS for their PC, they first visited Gary Kildall and his company Digital Research Inc. as they were interested in his CPM OS. But when they arrived, Gary was not there and more or less snubbed them and they instead went to see Bill Gates and as they say, the rest is history. I did many Computer Chronicle shows with Kildall and he refuted the idea that he intentionally snubbed them; regardless, the end result was that IBM ended up using MS-DOS and it became the heart of their and many PC Clone’s operating system for almost a decade.

Over the years Microsoft has become an industry behemoth and has gotten into many different businesses to help extend their Windows franchise. But from the beginning, Microsoft did have one important goal and focus. It was to give PC OEMs an OS and actually help them make money with their PCs. Microsoft licensed MS DOS and then Windows to PC makers and continued to refine it and upgrade it along the way. The PC vendors could then create hardware optimized for these operating systems and add value through hardware and software add-ons. With each new version of Windows, Microsoft helped their PC partners grow their business and as people upgraded from one version of the OS to the others, many people along the value chain were greatly enriched. Besides PC companies making money, VARs, retailers and value added service providers all benefited from an ecosystem in which they could build new designs and services around Windows and keep all of that money for themselves.

When it comes to money and value creation for their partners, Google’s goals are very different and this is what really sets them apart from Microsoft.

A One Sided Relationship

While they too have an OS that companies can license, the real goal of their licensed OS is to bring users of these devices into direct contact with Google’s ads and services. Google says they really want their partners to be successful and while that is probably true, what they really mean is that if partners are successful in distributing their OS, than Google can reap the majority of the financial benefits. Sources tell me that a company like Samsung, who is literally their largest partner and almost single handily making Android successful, gets only a 10% commission on any of Googles ads or services they bring to Google. That same 10% commission applies to a giant like Samsung as well as any other companies distributing Android on their smartphones and tablets, except for Amazon and Barnes and Noble. In these two cases, Amazon and Barnes and Noble have forked Android for their own uses and can keep all proceeds from products and services sold through their devices. This works because they have an ecosystem of books, music, apps, and services that are their own and don’t need Google’s content to be successful. But most of Androids partners, such as Samsung, HTC and others, must rely on Google for music, video and apps and must pay this very large tax to Google if they want to use Android.

This is not to say that Microsoft’s OS licensee fee is not a tax in its own right. However, once that fee is paid, Microsoft gets no extra revenue from their partners regardless of what they sell in way of their hardware and services. And even if they tap into Microsoft’s ecosystem of apps or services, I understand their revenue cut to their partners is much more than Google gives their partners. This is why there have been rumors that Samsung has not been happy with Google since they do all of the hard work in creating a device, optimizing Android’s OS and delivering a value added UI to it as well as managing the channels and pay to make their own ads. Yet Google treats their cut of the profits the same as a small player that sells a much lower volume of devices than Samsung does with their products. No wonder analysts are looking closely at Samsung’s recent decision to fold their own mobile OS called Bada into Tizen and suspect that if Samsung wants to control their own destiny and keep more of the app, ads and services for themselves, that they might move more and more to Tizen as their mobile OS of choice.

While many rag on Microsoft as being a 900 pound gorilla lording their wares over their partners with a heavy hand, they at least let their partners make and keep as much profit as they can from any products and services they offer their customers. Not so Google. They too are a 900 pound gorilla but in their case these vendors are just a front end distribution medium for putting Google’s ads and services before their customers and ultimately reap the lions share of most of the profits made at the expense of their partners. And in this sense, the difference between Microsoft and Google is glaring indeed.

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.
  • David Stevenson

    An astonishingly brutal and insightful observation. One small quibble, I think you should add to Amazon and Barnes and Noble the Chinese white box manufacturers that offer Android on their feature phones as the GUI because they need to have something, and since they don’t include any Google services on these feature phones, the only benefit for Google is the activation numbers (if that).

    • benbajarin

      Of course as this is the stick most hardware companies are in. They don’t have their own software so they must run someone else’s. The trick there is whether the OS you choose to run helps you make money. What it doesn’t do is differentiate you.

      • jz1492

        And that is why we will never see the end of Android’s worst problem: FRAGMENTATION. There is no way Google can convince manufacturers and carriers to make their phones interchangeable –the Chinese white box manufacturers are on the fence salivating over Google’s push at I/O 2013 to end this huge problem.

  • Defendor

    I really don’t see it that way. The differences are more minutia than substance.

    Microsoft wasn’t in business to help OEMs make money. MS was in business to maximize the sales of Windows licenses to maximize the Windows tax they earned. OEMs didn’t get a cut of MS profits and MS had no stake in HW maker profitability as long as the market was growing.

    Really the main difference seems to be that you chose to characterize MS as being in business to help OEMs and Google not.

    In reality both the Google and Microsoft business model encouraged a race to the bottom and commodity, low margin pricing of the HW. They both make their money on market share growth and the margins for OEMs are irrelevant to them as long as the market is growing.

    The only real difference is that race to the bottom is faster today, because the world moves in web time now, and in mobile phones, with faster upgrade cycles and subsidies, it is accelerated even more, and Google OEMs face a tougher entrenched competitor that takes more profit from OEMs.

    It is tougher for Google OEMs today, but the benefits/forces are aimed in the same directions as they were with Microsoft and it’s OEMs.

    • benbajarin

      One of the things that got us thinking about this happened many years ago. Being in the analysis business and providing insight and perspective and data on a wide range of tech topics gets us into very candid discussions with key execs at all the major players.

      Very early on during their workings with Google on Android, namely Rubin, we picked up on this theme. The vendors were frustrated with MSFT and glad for an alternative. Google positioned themselves as the solution. Then quickly it all changed and they (Andy) became more of a dictator than a partner. Many with OEMs went quickly to a they (Google) are worse to work with than MSFT.

      So they observation Tim focused on is that of how we have observed in a behind-the-scenes-way the hardware companies themselves point out these differences as well.

      That is not in the column but some context to it.

      • Defendor

        That is more a matter of degrees than real difference in model. The story paints Microsoft as some kind of benign white knight. When, as you would expect, both corporations are cut-throat competitors only in it for themselves.

        A case of the grass looks greener over there, then once there, pining for the “good old days” while seeming to forget how bad Microsoft really was in the “bad old days”.

        Remember this is the Microsoft that backed PC-Builders into a corner, and created a per-unit license structure that forced them to pay for Windows License, even if they shipped with a competing OS or no OS. Back then, you paid a Windows Tax even if you didn’t get Windows!

        The Google/Microsoft parallels are in the Market share rise, the indifference to OEM margin squeeze, and corporate arrogance while running over competitors/partners/consumers.

        These days I would say Google is worse than Microsoft, but it has a long way to go,before it is even in the shadow of how bad Microsoft was at their peak (before DOJ vs MS).

        • Krabbie

          The model difference that Ben was espousing was that MSFT sold a product and Google sold a product with strings attached which was this supposed cost sharing that Google does with ad revenue. So the builders are carrying the Google water out in the wild, when your typical pc was just out in the wild with not tether. Samsung et al were the retailers of Google ads and services. Google just sat back ad reaped. MSFT at least got out of the way once the OEM sold and updates were available directly from MSFT.

        • Hosni

          @Defender – Your first post said that Microsoft, no less than Google, ruthlessly maximizes profits, and I agree with you. But then again, so does the service station down the street from my house.

          Tim’s analysis is that Microsoft’s pricing scheme generated its revenues at the time of a PC sale, but then PC makers were able to keep 100% of any incremental revenues they generated after that point, whereas Google generates $0 revenues up front but keep 90% of incremental revenues generated by smartphones/tablets after the product’s sale.

          These different incentive structures have consequences. Having already maximized its take from the outset, Microsoft didn’t care very much what individual OEMs did with their computers and was less dictatorial than Google. Msft benefited most when industrywide unit sales of PCs was maximized, end of story.

          Not Google. Because Google’s revenues are generated AFTER the OEM sells its phone/tablet, Google must get and remain involved in their business to maximize its profits. Nothing the OEM does is irrelevant to Google, since OEM decision (product, marketing) might influence the amount of search activity or use of Google’s other software/services … and thus Google’s earnings.

          So Tim’s analysis is correct as far as it goes.

          However, both Microsoft (PCs) and Google (smartphones) mainly prospered by copying the successful OS’s and software of other companies, and buying those companies whose software they couldn’t copy. Such behavior reveals that the smart, motivated boys at the top of Microsoft and Google do not respect others, or they wouldn’t steal/copy/emulate their ideas with such gusto and enthusiasm. It also reveals that they are not original, creative thinkers or they would be embarrassed to issue derivative products simply for the financial reward.

          Lack of respect for others … unsurprisingly results in the abuse of OEMs, software developers, competitors and customers. They cannot help themselves, because that’s who they are. This, I believe, is more important for explaining the behavior of Microsoft and Google than the incremental incentives faced by either.

          Yes, yes … Steve Jobs ‘copied’ things. But he didn’t copy successful, working products where competitors had already done all of the heavy lifting. A more accurate perspective is that Jobs was ‘inspired’ by the ideas of others — ideas that he thought had great potential, but had been implemented poorly or not at all. But Jobs always did far more with those ideas than their originators did. Jobs was motivated to create the best experience for users — as he perceived it — rather than by profits, which he knew would result from a great product. He refused to sell uninspiring products to gain market share and profits. He did not conform in order to succeed. That’s why Jobs is a constant source of envy among the others. Apple follows its own agenda, and that’s why it is so unpredictable compared to the companies who don’t.

          While we’re on the subject of creativity: Google Glass, computer-controlled cars and other spectacular ideas do not represent creative business concepts or products. The ideas themselves are not new — Arnold Schwarz’s “Terminator” had built-in Glass, George Jetson ‘car’ drove him to work — and they are not commercially viable. They are just things that rich boys buy for themselves because they’re curious and can afford them. I don’t criticize that for what it is — in their position I would do the same — but onlookers are wrong to credit this as creativity in the sense the term is used in the business world.

          Creativity in a business sense refers to assembling resources (including ideas) in a new way that provides so much satisfaction to consumers that they’re willing to pay more than the cost of assembling those resources. Glass and Google’s numerous other projects fail that test. When $1 worth of resources can only be sold for 60¢, that’s 40¢ in wasted resources. A car with square tires would fail the same test in the same way.

          There are, I hasten to add, an UNLIMITED SUPPLY of cool ideas that one could pursue if money were no object. A 13-year old boy in my neighborhood has them every day. That is called imagination, not creativity.

          • mhikl

            “Google’s and Microsoft’s lack of respect for others extends in every direction: OEMs, software developers, competitors and customers (especially their privacy). The boys atop Google & Microsoft cannot help themselves, because that’s who they are — and it is apparent in nearly everything they do. This mindset, I believe, is more important for explaining the behavior of Microsoft and Google than the incremental incentives faced by either.”
            I think you are suggesting important elements of their DNA. Then you go on to compare the more enlightened approach of Jobs, hence Apple. and the social side of Apple’s commercial marketplace is better understood.

            Hosni, I certainly appreciate how well you put together ideas. Your points might be understood individually, but your connexions and context, for me, certainly made the arguments much clearer. Namaste.

        • Rich

          Back in the day, Microsoft was a predator.

      • Lowry Brooks

        Google really is worse than Microsoft. Andy Rubin and Google could give them a free operating system but now it is looking to be worse than Microsoft.
        Hint hint, Samsung’s Tizen project.

    • “In reality both the Google and Microsoft business model encouraged a race to the bottom and commodity, low margin pricing of the HW. They both make their money on market share growth and the margins for OEMs are irrelevant to them as long as the market is growing.” – Defendor

      This. Microsoft watched OEMs slit their own throats to make razor thin margins while it banked close to 90 percent margins on Windows and Office, of which OEMs didn’t see a dime. Google has just perfected the model. Whereas OEMs had to pay Microsoft for the privilege of fighting for scraps, Android OEMs IN THEORY don’t have to. But skinning Android probably isn’t cheap and most, if not all, Android OEMs are still paying Microsoft licensing fees for patents.

      As Defendor pointed out, they seem to be different by degree but not by practice.

  • Joe_Winfield_IL

    I would argue that for Microsoft, Windows is an end unto itself. For Google, Android is merely a means to an end; that end of course is page views and clicks on Google sites. Microsoft spends billions developing and maintaining an OS, and monetizes that investment by selling licenses. Google spends billions developing and maintaining an OS, and monetizes that investment by selling ads. But the ads aren’t sold to the OHA licensees, they are sold to a completely different set of clients. These ad-buying clients don’t even care whether the ads are displayed on Android devices, so long as Google can place them in front of the right users.

    Of course Google wants Android to succeed, but the company doesn’t fail if another OS takes over the market…so long as end users search the web and visit Google’s properties regularly. An iOS user is largely the same to Google as an Android user, so long as they stay logged into their Google account and use Search, Docs, Maps, YouTube etc. on a regular basis. When viewed this way, Google’s goal for Android should really be all about getting the modern mobile internet experience in front of as many users as possible as quickly as possible. By all accounts, Android is doing exactly that. It is dominating in the low and mid range, and it is monolithic in many emerging markets. If new users change from Android, it is likely because they want a richer experience in the future. This type of shift doesn’t cause Google any pain, as it signals that the user will likely consume more data and visit more Google properties.

    • Lowry Brooks

      Google wins either way. But imagine that WP picked up steam and absolutely destroyed android in most western markets from prepaid to high end phones. Then all Microsoft has to do is start their own advertising network (Or Acquire one) and allow WP devs to use it, then they could hurt Google at the core of Google’s business…

      • Joe_Winfield_IL

        I should have stated that Microsoft is the exception to the rule. And many have suggested that Windows Mobile was the original target of Android to prevent exactly this scenario.

        • Lowry Brooks

          And now, however, android has become exactly what Google and OEMS wanted to avoid.

          All revolutions fail. 😀

      • Rich

        That’s about as likely as lightning hitting me in the next 5 seconds…

        Nope. Didn’t happen.

        • Lowry Brooks

          I know… But it was still possible..

      • XeX

        more popularity fo WP means google gets hurt, as WP users use Bing to search (as it is one click away) instead of using google, and they won’t even notice the difference of the results 🙂 and as we can see, WP is growing so fast! but so is Android, about time iOS gets kicked out 😛 (if iOS7 won’t bring something new)

        • fandroid98

          Yeps.

  • def4

    Thanks for the story about the early days of the PC. I really enjoy learning about these things.

    I’m a bit confused about the status of Android OEMs and the money flow between them and Google. Are you saying Google makes them pay an ongoing license fee for each device that uses Google Play?
    I was under the impression that Google simply forced an all or nothing deal: either use all Google services with all the integration points dictated by Google or no Google services at all. Maybe that sounded more appealing in 2008-2009 when the OEMs were up the Symbian and Windows Mobile creeks without a paddle than it sounds in 2013, but that doesn’t say anything about Google.

    And what about the 10% and the comparison to Microsoft? When was the last time Microsoft gave anyone a percentage of Windows revenue or of anything else?

    Are you sure you’re not simply hearing from some incompetent whiners that are crying about how completely they were pushed over by Samsung?
    And for Samsung’s part, they’re greedy. I doubt that takes anyone by surprise.
    We’ll see if they’re also stupid and deluded enough to risk blowing up the excellent position they have with Android by chasing Tizen.

    • benbajarin

      Tim is going to do some more of these industry stories in some upcoming features we are bringing out.

  • Dan

    It’s a matter of who’s your customer:
    – For Microsoft it has been the OEM’s.
    – For Google it has been the advertisers.

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