In recent years, Microsoft's (NASDAQ:MSFT) biggest adversary has been Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, which attacked the tech titan with free productivity software, operating systems, and a massive ecosystem of web services. However, Microsoft is striking back at Google with Windows 10, which uses Bing as its default search engine in most markets.
To enhance its regional strength, Microsoft recently partnered with Chinese search engine Baidu (NASDAQ:BIDU) and Russian search engine Yandex (NASDAQ:YNDX). In each market, the respective search engine will become the default homepage and search engine for the new Edge browser in Windows 10. Both companies will also launch "universal" Windows 10 apps for services like search, maps, and cloud storage.
In China, Bing will remain the default search engine for Windows 10 and the Chinese version of Cortana. However, Baidu will promote a dedicated "Windows 10 Express" distribution channel for quick upgrades to its 600 million plus users. Microsoft estimates that Windows 10 has already been installed on 10 million devices across China. In Russia, Yandex will become the default search engine for the entire Windows 10 ecosystem.
Attacking Google's soft spots
China and Russia have both been notoriously tough markets for Google, which processes 68% of searches worldwide. Google was blocked in China four years ago after it accused the government of hacking Gmail accounts.
As a result, it no longer has a piece of the Chinese search advertising market, which eMarketer expects to grow 33% annually to $14.9 billion in revenues this year. Baidu, which controls over 70% of the market, will claim the lion's share of those revenues. Bing controls less than 1% of the market, but the growth of Windows 10 and Baidu's backing could give it a healthy boost. In exchange, Baidu can widen its defensive moat against Qihoo 360, the second largest search engine in China.
Google isn't banned in Russia. But this May, the country threatened to ban Google, along with several other U.S. sites, if they didn't agree to hand over data on Russian bloggers or allow the Kremlin to block certain websites. According to Livemarket.ru, Google processes 35% of searches in Russia, compared to 58% for Yandex. With Microsoft's assistance, Yandex could expand its lead over Google.
How does this help Microsoft?
Unlike Google, Microsoft's top priority isn't expanding its search engine. eMarketer expects Bing revenues to rise 18.5% annually to $3.45 billion in 2015, but that would only account for less than 4% of its projected revenues for the current fiscal year.
Instead, Microsoft wants to install Windows 10 on "one billion devices by 2018" to create a cohesive "One Windows" ecosystem. By reducing fragmentation with its new OS, it can tether more users to cloud-based services like Office 365 and OneDrive. This would help Microsoft achieve its goal of generating $20 billion in annual cloud revenues by 2018.
Just as Google gathers user data through search, movements, and mobile data, Microsoft now uses the entire Windows 10 OS to gather data on its users. Microsoft would likely prefer offering Bing as the default search engine for Edge, but it would simply be smarter to piggyback off Baidu and Yandex's presence in China and Russia, which have a combined total of over 800 million Internet users.
Alphabet should keep an eye on Microsoft
Microsoft's alliances with Baidu and Yandex complement the company's other recent moves against Google. Other strategies include offering Windows 10 as a limited free upgrade, dropping Windows licensing fees for phones and tablets, bundling free trials for Office 365 and OneDrive with new devices, and convincing Android OEMs to preinstall Microsoft apps on new devices. Microsoft also made it easier to port Android and iOS apps to Windows 10, which helps developers reach a larger ecosystem of phones, tablets, PCs, and Xbox Ones.
While none of these strategies will likely cripple Google, they highlight Microsoft's new strategy of playing offense instead of defense. Therefore, Alphabet investors should keep an eye on these shrewd moves, which could chip away at Google's global market share in unexpected ways.