Google Has Destroyed Microsoft's Business Model

Microsoft (NASDAQ: MSFT  ) has long been dependent on selling software -- its business centered around charging licensing fees for the Windows operating system and the Office software suite. But thanks to Google (NASDAQ: GOOGL  ) , those days are coming to an end.

By offering its operating systems and software for free, Google has slowly eroded Microsoft's ability to charge for its products. To stay relevant, Microsoft may be forced to completely change its business model.

Windows: Cheap or free?
While the ongoing decline of traditional Windows-based PCs has largely been characterized as a byproduct of Apple's meteoric rise, in truth, the real culprit has been Google's Android. Shipping on the vast majority of both smartphones and tablets, Google's mobile operating system has slowly eaten away at the demand for Microsoft's Windows.

Earlier this week, research firm IDC revised its PC shipment estimates down, predicting that sales of Windows-powered PCs would continue to decline in the coming years. Previously, IDC had expected more demand from emerging markets, leading to a stabilization in Microsoft's core market.

But that demand doesn't appear to be there. Instead, emerging market buyers are turning to mobile devices powered by Google's Android. Eventually, Google's mobile dominance could spill over into the traditional PC market as well, as major PC manufacturers, including Lenovo, have unveiled Android-powered desktops.

Unlike Microsoft with Windows, Google doesn't charge for Android, which makes the operating system far more appealing to device manufacturers and ultimately end consumers. The same is true for Chrome OS, the web-dependent operating system that Microsoft's traditional hardware partners are increasingly embracing.

To bolster its market share, Microsoft may be forced to follow Google's lead, slashing its licensing fees, perhaps to zero. According to PC Mag, Microsoft is considering cutting the cost of a Windows Phone license fee by as much as 70%. The same is true for some versions of Windows 8. According to Bloomberg, Microsoft plans to cut Windows 8 licensing fees for copies of the operating system installed on certain low-cost models.

Microsoft is even considering giving away a version of Windows 8, according to The Verge. This edition, dubbed "Windows 8.1 with Bing," could be a free or low-cost update for owners of PCs running older versions of Microsoft's Windows.

Office Web Apps reborn
Google has also put some pressure on Microsoft's Office with its competing web apps. Free for consumers, and cheap for business users, Google's management has argued that it could eventually capture 90% of the market for Microsoft's Office.

Nothing close to that has happened yet, and given corporate America's addiction to Microsoft Office, it might never happen. Still, Microsoft appears to be mindful of Google's expansion into the Office market, and has responded with its own free version of Office.

Office Web Apps, originally launched in 2010, was a stripped-down version of Office available for free online. Last month, Microsoft made some significant changes to the product, renaming it "Office Online" and introducing a number of improvements.

It's still free, but is now deeply integrated with Microsoft's other web services and allows for real-time collaboration, making it a true alternative to Google Apps.

Is Bing the future of Microsoft?
Investors have long been critical of Microsoft's online efforts: Hedge fund manager David Einhorn argued in 2011 that Microsoft should get out of its money-losing online businesses, most notably Bing.

But Microsoft's management has remained protective. Now former CEO Steve Ballmer, responding to the criticism of Bing, said late in 2012 that he was "glad" Microsoft invested in Bing, and that he was "more excited about [it] than people would think." In his final speech to Microsoft's shareholders as CEO late last year, Ballmer again defended Bing, arguing that it was integral to the company's future.

That could ultimately be the case. If Microsoft has to follow Google in offering its software for free, it will have to monetize it in other ways: Making money from its web services could be one way to accomplish that.

In the 1990s, Microsoft was able to destroy the once-dominant Netscape Navigator and conquer the browser market by giving Internet Explorer away for free. Since every Windows PC came with a free copy of Internet Explorer, there was no reason to shell out $49 for a Navigator license.

Slowly but surely, Google seems to be doing the same to Microsoft. With Gartner analysts expecting Google's Android to subsume the market for Microsoft's Windows by 2017, Microsoft will have to transition to a business model that doesn't depend on selling software.

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Read/Post Comments (22) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2014, at 11:52 AM, GaryDMN wrote:

    Google has forced a new era of Microsoft Windows, the most popular OS. Building Bing search directly into Windows OS and giving away Windows OS, could easily end up hurting Google, a lot. This could be huge for MSFT !

  • Report this Comment On March 06, 2014, at 12:51 PM, armee23 wrote:

    How google destroyed Microsoft business model if every quarters they are breaking revenue and profits? Google still relying heavily on their search,so much hype on this stock.

  • Report this Comment On March 06, 2014, at 2:09 PM, Imsprkfool99 wrote:

    Unlike Microsoft, Google has lost control of Android with Chinese companies like Samsung issuing their own versions. It is both sad, and laughable, when customers, seeking cheap, buy "Android" products, pop open the box, and find out that a search inquiry sends them to Baidu ... in Chinese.

    Worse, for Google stockholders, and I doubt Motley Fool has considered the consequences yet, GOOG plans to split its shares. Holders of Class A stock, ticker GOOG, will wake up finding themselves holding GOOGL shares which will now be the Class A voting shares, and GOOG shares, which will become non-voting Class C shares. People are bound to be confused and irate when holders dump non voting shares to acquire GOOGL shares.

  • Report this Comment On March 06, 2014, at 3:40 PM, chilero wrote:

    Apparently Windows 8.1 with Bing is simply a lower cost version of Windows similar to Windows Starter editions of years past designed for emerging markets.

    Bing comes as the default search engine. OEMs can't receive money from Google or whoever for a different default search engine to be loaded. Customers can still choose which search engine they want.

    http://winsupersite.com/windows-8/windows-81-bing-revealed

  • Report this Comment On March 06, 2014, at 5:33 PM, TheCodeWrangler wrote:

    So it seems that Google may have done to Microsoft what the latter did to Netscape back in the day when they gave away IE for free, destroying Netscape's business model.

  • Report this Comment On March 06, 2014, at 6:54 PM, techy46 wrote:

    Microsoft continues to thrive licensing Azure, Windows, Windows Server, SQL Server, SharePoint, Exchange, Visual Studio and ERP's to enterprises and enterprise workers. Yes, they may be offering a dumbed down version of Windows 8.1 for consumer monkeys and sheep. So what, they make up the license fees by building it into their Lumia and Surface devices and Bing and Office online apps. Wait and see what happens when Samsung and other Asian vendors dump Android for Tizen and Google's ad revenue goes down the toilet. Android adware is a STD.

  • Report this Comment On March 06, 2014, at 7:02 PM, tshumway wrote:

    Microsoft's business model (and Netscape's) was doomed long before Google was a glimmer in the founder's eyes. "selling" the infrastructure/platform is only possible if you have a monopoly (cf gasoline taxes). If you want to make money selling software, you have to so completely dominate the market that no one can challenge you (Microsoft did this for a long time, as did Novell, and IBM before them) or provide value that no one else can provide (Innovators do this. By the time imitators make their product a commodity, they are long gone on to something else).

  • Report this Comment On March 06, 2014, at 7:15 PM, tshumway wrote:

    If I understand things correctly, Android was never a profit center for Google. Google new from the beginning that it was just infrastructure. How is Tizen replacing Android a threat?

    It is sad to me that selling advertising has become the dominant revenue model for internet-centered companies. :-(

  • Report this Comment On March 06, 2014, at 11:57 PM, RMacky wrote:

    I really don't see Android being the cause of Microsoft's troubles. First off, Microsoft has made a lot of boneheaded moves over the last 10+ years to make themselves vulnerable to losing their Windows and Office markets.

    Finally, Apple has done a much better job of penetrating Government, Business, and Education markets then Android: THAT'S Microsoft's home turf and main money tree.

    Android has generally done well with the low-end consumer crowd willing to flock to the latest $50 blue-light special. Google even has been unsuccessful selling its own branded cell phones and tablets. The only successful manufacturer of Android phones has been Samsung who bought their business by out-spending Apple and all other Android-based manufacturers COMBINED, and are under fire by their stockholders for making only razor thin profits.

  • Report this Comment On March 07, 2014, at 6:31 AM, FilmDude wrote:

    Apple is next to get screwed over by Google. Despite the claims of people like RMacky (Samsung's razor thin profits) the bottom line is Samsung's has blown Apple out of the water in terms of marketshare. Samsung's profits are actually good, btw.

    The majority of smartphones and now tablet have some variation of Android. Does this sound familiar? Apple went for the high end crowd in the 80s, until Windows took over the market. Apple was nearly dead by the time Steve Jobs took over. Selling a few high end computers to just a comparatively few people is not a sustainable market. Plus, if an operating system's marketshare becomes too small, then developers will not develop for it. Android's huge marketshare ensures that developers will develop for it. Lastly, Steve Jobs died, and it doesn't seem like Apple under Tim Cook is as innovative as it is under jobs.

    And as far as education goes, Chromebooks have been pushing aside Ipads and rapidly gaining marketshare.

  • Report this Comment On March 07, 2014, at 12:07 PM, symbolset wrote:

    In addition to being free Android and ChromeOS are lightweight operating systems that don't require a lot of processor, RAM or storage. This is often overlooked and is very important.

    Even if it were free, Windows requires much more of those three things. That limits the lower range the machines can cost and how a well-working total system can be designed.

    Because of this, systems with Google operating systems have the bottom end of the price range all to themselves. This is where sales are going in emerging markets.

    This is a big deal because Microsoft can mark down the price at a stroke of a pen. To re-engineer Windows though to be as slim and light as Android and ChromeOS is a daunting task requiring many years - if it's possible at all.

  • Report this Comment On March 07, 2014, at 12:50 PM, tmarsh92037 wrote:

    Not at all true, even though Google would love it to be true. MS is still generating huge rev and profit from users, primarily enterprise. Salesforce.com is probably the one to get credit for driving the new business model for everyone but consumers. Long way to go in this battle but way too early to RIP anyone. As Motley, you should be looking for the next big player not churning the same old arguments.

  • Report this Comment On March 07, 2014, at 5:52 PM, VegasSmitty wrote:

    The people at MS read this drivel and laugh all day.

  • Report this Comment On March 07, 2014, at 10:59 PM, jluizberg wrote:

    I really disagree to this article for many points:

    First, I see nothing wrong in the traditional model of selling software. It is fair, because developing a good software takes a lot of time, efforts and money, so I see nothing wrong on charging for this product. The only problem are the actual values. If you offers me today for choosing between a free Chrome OS and a Windows 8.1 at $30-40, I will take Windows.

    Second, I see a great confusion around mobile and workstation OS. I am an IT professional, and use workstation software daily for many hours, and I am not even thinking about using a mobile OS for these tasks. They are completely different systems, with many points in common, but even more differences. There is absolutely no need to use the same OS for both as alleged in the market. So mobile OS are for mobile devices, and workstation OS are for workstations. MS is planning to reduce the cost for mobile devices, forced to that because their main competitors are free (at least for the end user). This would be considered a very hard case of dumping. In reality it is, except for the third point.

    Third, and most important, because they sell completely different products. MS sells software, and Google sells information. Google offers free products for end users to be able to get their main product: you. That is it: their product is you. Your personal information, your buying habits, cultural, social, religious and political orientation, interests, geographic location, and many more data, that after a lot of computing becomes one of the most important and valuable products today. Apparently, this is a good balance: you give your information for using free products, but the balance is not truly fair and this may be easily seen in the market value of Google today. Other problem is that this kind of dumping may kill the competitors, and make Google become the only owner of all this information, accumulating a power that was not supposed to be in the hands of anyone.

    I personally think that MS business model is a lot fairer that Google’s, and feel a lot uncomfortable about the actual situation of the market.

  • Report this Comment On March 08, 2014, at 12:34 PM, john4828 wrote:

    Google Chrome sux! I'll never buy another chrome notebook

  • Report this Comment On March 08, 2014, at 1:03 PM, jssiegel wrote:

    Speaking from the perspective of over 40 years in the bit herding business, IMO Microsoft destroyed Microsoft's business model. They were well positioned for the desktop and thick client/server generations, but for the thin client [browser]/cloud generation their products are just too bloated - reference Detroit's tail fin and shiny stuff [sorry, Chrome is now a trademark of Google] era. Windows 8 may be improved under the hood, but the user interface makes me want to scream. Their data center products are in a saturated market, and it will be a tough battle for share - especially since Sybase is now part of software titan SAP.

    Bottom line, I won't be buying either Microsoft products or its shares.

  • Report this Comment On March 08, 2014, at 2:47 PM, cmalek wrote:

    @jluizberg:

    "developing a good software takes a lot of time, efforts and money"

    It takes a lot of time, efforts and money to develop Open Software but it FREE. Microsoft business model is sustainable only if you have a monopoly or a near monopoly.

    "If you offers me today for choosing between a free Chrome OS and a Windows 8.1 at $30-40, I will take Windows."

    You can have them both, I would (and did) choose Linux. Microsoft as it stands today is dead except it doesn't know it yet. As long as M$ tries to market one size fits all O/S, it is doomed because the product will not satisfy anybody. It will be hard to use in a business environment and it will be too bloated for mobile devices.

  • Report this Comment On March 08, 2014, at 5:23 PM, idealab wrote:

    The author missed an important point about the decline of PC shipment. It has little to do with Microsoft or Google, the computers today are just simply powerful enough for most people's need and the upgrade cycle in term of value/feature is simply not as compelling as twenty years ago.

    Twenty years ago, a CD-ROM cost as much as today's computer. A 2GB hard drive was uncommon and cost $1000. 8MB EDO memory cost $250. The hardware was lugging behind the software. By the time Windows XP and Vista were introduced, the average hardware on the market could play DVD, access 100Mbps ethernet, process large graphics, play video, and by the time dual-core came around, the hardware for the most part far exceeded the software requirement. Even today's cell phones have dual-core, quad-core CPU, when you put it in perspective, fifteen years ago dual-CPU (instead of dual-core on one CPU) was reserved for high end servers and workstations and command over $3000 a machine.

    Nowadays, even a decade old PC can run Windows XP or even Windows 7 with sufficient speed for the average users. Adding a decent graphic card, you can watch HD video, process 10 mega pixel JPEG, surf the internet, and do normal office work. Fewer people have the urge to upgrade their five-year-old dual-core PC.

    This is why the PC sales is declining as a percent relative to the past, but not necessarily in absolute number. The growth period is over as more people move toward portable non-PC devices. Even companies like AMD, Intel suffer from this decline.

    Google is not that much better than Microsoft. They have a practical monopoly on search and search advertising. They use other people's software work, modify it and give it away. Of course their research and development cost is much lower, and can be easily subsidized by their main business.

    This is also likely the reason Microsoft went into the cell phone business, with the eventual goal of one platform for all devices to make life easier for Windows developers (Windows Phone, Windows RT and Windows).

  • Report this Comment On March 08, 2014, at 9:53 PM, jvgfool wrote:

    This article is a waste of time.

  • Report this Comment On March 08, 2014, at 10:07 PM, lowmaple wrote:

    As a computer moron l have to depend on a system like MS. However after buying a Lose 8.1 loaded computer there's got to be something better than this. How Microsoft shares could increase after this product is a mystery to me.

  • Report this Comment On March 09, 2014, at 2:08 PM, gkirkmf wrote:

    It is amazing to me that more Windows 8.1 users have not discovered Classic Shell. It allows folks to rollback time to 7.1, Vista, or XP..... It simply makes 8.1 work like windows always did, and since most of the apps are worthless that come with 8.1, you don't loose anything... but if someone invents an app that you absolutely have to have, it is easy enough to switch back and forth to the new 8.1 desktop. Classic Shell is free (donation ware) to try and use forever for that matter. It allows you to take advantage of the new stuff under the hood in Windows 8.1 and Office.

    There is yet another good reason to stay on Windows... try finding a serious database app like Office Access on android... not happening. I have used and coded under Windows, Sun Unix, Linux, Palm OS and I still use Windows for my personal machines. Was in the biz for 41 years... I don't expect that Google will end Microsoft's business model, and I don't expect that Bing will ever reach the same potential as Google Search....

    Disclosure: I don't own any Microsoft stock.. I do own Google...

  • Report this Comment On March 10, 2014, at 12:01 PM, thinkspace wrote:

    How does MSFT's enterprise software fit into this? Don't they still sell a ton of Sharepoint, SQL Server, etc...

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