BUSINESS

The struggle to own the Internet

Microsoft and Google are digging in for a fight to control the way we communicate

JASON KIRBY May 21 2007
BUSINESS

The struggle to own the Internet

Microsoft and Google are digging in for a fight to control the way we communicate

JASON KIRBY May 21 2007

The struggle to own the Internet

BUSINESS

Microsoft and Google are digging in for a fight to control the way we communicate

JASON KIRBY

Quincy, a two-traffic-light town in the foothills of central Washington state, seems about as far away from the cutthroat world of American capitalism as you can get. This is farming country. Irrigation pipes snake across the land. The only place to get a new set of wheels is the John Deere tractor dealership. Unless you know where to look, you'd never guess this is a staging ground for what promises to be the most epic corporate battle of a generation.

On the northwest edge of town, a hulking grey building the size of a Wal-Mart Supercentre rises from an old bean field. It’s clear from the floodlights and imposing black fence, though, that this is no big-box store. When construction of the windowless monolith is complete, it will house a new type of farm— what’s known as a server farm. Or, to be more precise, a data centre, one vast enough to store and process an almost-inconceivable reservoir of digital information. There are no signs to say who owns it, but this is Microsoft’s project. And the Redmond, Wash.-based technology giant has plans to erect another data centre nearby, and then another. Six massive storehouses of hard drives and circuit boards in all, sprawling across 75 acres of farmland. You’d almost think they were trying to send a message.

And they are. This is ground zero for the information arms race. Just down the Columbia River in Oregon, Microsoft’s key rival, Google, is building its latest server farm. The Web search and advertising company has plans for another data centre on 500 acres in South Carolina, and work has begun on a massive new facility in the Netherlands, adding to Google’s staggering arsenal: an estimated one million servers humming away around the globe. The proliferation is tangible evidence of a fight for global domination, observers say. “Data centres are the baseline level at which these companies are

going to do battle,” says Rich Miller, editor of Data Center Knowledge, which tracks the industry. “Everything builds up from there.”

Last week, the brewing rivalry bubbled briefly into the open with confirmation that Microsoft has been pursuing a takeover of Yahoo!—currently Google’s most direct competitor. Analysts estimate Microsoft would have to pay in the range of US$50 billion, but the move would instantly vault Bill Gates’s behemoth into a dead heat with technology’s newest powerhouse.

What’s the ultimate goal in this high-stakes showdown? Nothing short of all of the world’s knowledge and experiences. Both companies have vowed to aggregate every bit of information as it courses around the world—yours, your company’s, your government’s— and to control how it’s produced, sorted, retrieved and transmitted. Everything from obscure texts and old newsreels to your emails, office work, photos and that grainy 8-mm footage of Uncle Joe when he was a kid.

The sum total of human knowledge and experience.

“It’s a mammoth opportunity in terms of the value of all that information,” says Rob Enderle, principal analyst of Enderle Group, a technology consultancy in San Jose. “People have talked about doing this before but we’ve never had the technology to digitize everything, index it and give people access to it.”

There are billions to be made and at least that many questions to be answered—about ownership, and privacy, and how to regulate what is sure to be the world’s biggest business, with almost limitless potential.

AS IS OFTEN THE CASE when superpowers face off, there’s been no formal declaration of hostilities. But last week’s revelations about Microsoft and Yahoo! were just the latest sign that the battle is on. In the past few months, Microsoft has publicly argued Google poses a threat to the rights of copyright holders, to

the privacy of Web users, and to open competition in Internet advertising. Google, meanwhile, has gone after the hearts and minds of technology users with a barrage of free online services that threaten the Microsoft profit machine like nothing else before.

More than anything, though, the companies are drawing on their arsenals of cold hard cash to finance their quest for dominance. Microsoft, with US$28 billion in its hoard, and Google, with US$11 billion, have laid out massive sums in a barrage of big-ticket deals

over the last year that have pushed their battle to new fronts, including wireless content, video game advertising, voice activated search tools, online video and even the realm of health care. Just last month, Google beat out Microsoft to buy Internet technology firm Doubleclick for US$3.l billion.

The companies are convinced that cutting such huge cheques will let them harvest even bigger returns from the flow of information running through their servers. There’s definitely no shortage of the stuff. Consider just a second’s worth of recent posts on twitter, com, which allows its 100,000 users to instantly share their thoughts and actions at any moment of the day:

emotioner: Bombings in Shiite Areas Kill 86 in Iraq

polenweb: I have the munchies so bad. The house smells like poop. Emily just had a

nasty ass something musta died in her body diaper.

duwanis: Hate it when the bagboy tries to guess what I’m having for dinner arisen: i’m using this dumb site!

Free verse, Internet poetry or digital detritus, the twittering masses now generate more information in a single year than in the millenia since man first learned to communicate. According to research firm IDC, the world churned out 161 exabytes of digital information in 2006—an amount roughly equal to 12 stacks of books reaching from the earth to the sun. Put another way, you could fill the entire U.S. Library of Congress a million times over with the information we generate each year. And yet we’d still need somewhere to store every episode of The Simpsons that’s been posted on YouTube.

In the eyes of Google, Microsoft and many others, every byte is potential money in the bank. Eric Schmidt, the chief executive of

Google, is one of a new breed of philosopher CEOs who love to revel in ponderous questions about the Internet’s ultimate impact on humanity. But Schmidt got right to the point at a recent investor conference when he asserted Google’s long-standing mission “to bring all the world’s information to each person, on

every device, in every location.” A week later, Microsoft’s CEO, Steve Ballmer, echoed that war cry, telling an audience at Stanford University the company dreams of “helping people find and organize and manage the... ocean of information that the world is creating and that they’re creating themselves.”

The information confabulation goes far beyond the mindless chatter on social networking sites. Online video accounts for a huge chunk of the annual info-crop, but it is just the beginning. Whole archives of old newsreels are being digitized. Later this year the NBC network and News Corp. will launch their own online video venture offering streaming TV shows and movies. Meanwhile, huge amounts of bandwidth will go to broadcasting live video images across the Web. At the same time, massive projects are underway to scan and digitize much of the world’s paper-bound knowledge. Google has famously forged ahead with plans to digitize mil-

lions of books and make them searchable, ignoring lawsuits that accuse it of copyright infringement. Not to be outdone, Microsoft, in conjunction with publish-

ers, has its own book scanning project. There’s still plenty of information left to conquer. At present only about 1.5 per cent of the nine billion documents in the U.S. National Archive are expected to be digitized any time soon. The other 98.5 per cent could be a highly lucrative business, All of this raises huge possibilities and pro-

found fears. “Information is an extremely important resource. It’s the fuel and raw material of citizenship, so we should be deeply concerned about the ways it operates in our lives,” says Siva Vaidhyanathan, associate professor of culture and communication at New York University. “Do we want just one or two companies to be the portal to all of the important information of the world?”

Google, which has led the digitization charge, likes to present its plan in utopian terms. Google co-founder Sergey Brin once went so far as to say “the perfect search engine would be like the mind of God.” But the Almighty has a lot to learn from Google when it comes to cashing in on omnipotence.

Google’s growth has been phenomenal. In the time it took Microsoft to develop and launch its much-delayed Windows Vista operating system, Google grew from a nifty search engine with a quirky name (a googol is a term for a one, followed by 100 zeros) to an Internet giant. With a market capitalization of US$147 billion, Google is on par with IBM, the granddaddy of computing, and already half the size of Microsoft. The company handled roughly 3.5 billion search queries last month, according to Web measurement firm Comscore, giving it a 48 per cent share of the market and growing. Microsoft, which has sunk more than US$1 billion into its own online search initiatives, is far behind with just 9.6 per cent. And by earning a few cents each time surfers click on one of the ads it has placed all over the Internet, including inside personal emails sent through its Gmail service, Google raked in US$10.6 billion in profit in 2006, up a stunning 73 per cent from the year before. Microsoft’s online ad revenue is barely a quarter of that amount. “Google is completely unlike any of the corn-

panies Microsoft has pounded into the ground over the years,” says venture capitalist Paul Kedrosky. “They’re more like Microsoft was in its early days—young, hungry and aggressive.”

As it goes after a wider slice of Web users’ lives, the company is setting its sights on a raft of new areas. Google already offers a dizzying array of applications, from online calendars and a photo editor, to maps and shopping services. And with each new step, it tramples further onto Microsoft’s territory. Last month, CEO Schmidt demonstrated a new presentation application similar to Micro-

The companies have plenty of cash to fuel the fight. Google: $11 billion. Microsoft: $28 Billion.

soft’s ubiquitous PowerPoint. That’s in addition to a word processor and spreadsheet program. He stuck to his story that Google is not targeting Microsoft, but no one believes him anymore. Google’s offering, according to Jim Murphy, an analyst with AMR Research, is “the most substantial challenge to Microsoft on the enterprise desktop in more than 10 years.”

That may be nothing compared to what Google really has up its sleeve. How about a Google Bank, a Google Phone and even a Googlenet? Piece by piece, company watchers are assembling a picture of what Google will look like in the future. Robert X. Cringely, a noted tech pundit, says the company has been furiously buying and leasing swaths of unused fibre optic cable buried underground. He believes the network could act as an alternative to the creaking Web should Internet providers clamp down on how much bandwidth users are allowed. “Google wants torn its own way—control the Internet,” he wrote recently.

“In fact, they probably control it already and we just haven’t noticed.”

Meanwhile, Stephen Arnold, a retired engineer and author of the book The Google Legacy, says the company is readying itself to do battle across a host of industries. Arnold regularly mines Google’s patent filings for hints of what the company has planned. “I try to deconstruct the legal baloney,” he says, “so I can figure out what the hell they’re building.” Arnold says he’s spotted six industries Google may tackle. There are various patents around financial services transactions and managing largescale corporate databases. But most interesting of all are those filings that show Google developing telephone infrastructure. Schmidt has said he foresees free cellphone service in the future, while the company has long been rumoured to be working on a Google cellphone in its labs.

Add it all up, and it looks like we’re headed for a Google World. Some speak darkly of the company’s shock and awe campaign. In early April, BusinessWeek magazine posed the question “Is Google too Powerful?”

Microsoft, long regarded as high tech’s bad boy thanks to epic antitrust battles in Europe and America, is doing everything it can to foment the notion Google is the new thug on the block. In a speech in March to book publishers, Thomas Rubin, a Microsoft lawyer, blasted Google’s book-scanning project

as a way for the company to rake in billions without creating any content of its own. And within days of Google’s takeover of DoubleClick, Brad Smith, another Microsoft lawyer, called on regulators to review the deal. “This proposed acquisition raises serious competition and privacy concerns,” he said. “It gives [Google] unprecedented control in the delivery of online advertising, and access to a huge amount of consumer information by tracking what customers do online.”

Yet for all the bluster and hype that accompanies every move Google makes, it has a glaring Achilles heel. Google is not primarily a technology company. It’s in the ad business, which isn’t the greatest, fastest-growing industry out there. Google still generates 99 per cent of its revenue selling ads, despite efforts to diversify. Supporters of the company point

out global advertising is a US$150-billion a year industry, and online ads account for just a tiny fraction, leaving lots of room to grow. But Google is still in a dicey position. Advertising is extremely cyclical. Any downturn in the ad market could cripple its finances.

Navigating the ups and downs of the ad world will be easy, though, compared with making all of its free services pay off. Google’s costs are soaring as it rushes to build the infrastructure needed to host its suite of applications, like those mammoth data centres. Capital costs doubled to nearly US$2 billion in 2006, and are likely to more than double again this year, outstripping revenue growth. Users will eventually be asked to pay up by giving Google greater access to their personal thoughts, interests and desires so it can resell them to advertisers, similar to the way Gmail

scans users’ email for keywords. Vaidhyanathan isn’t sure people have come to terms with the pay-with-your-privacy business model. “We’re dazzled and thrilled by the convenience and abundance that Google offers, but I don’t think we’ve taken a good look at the real terms of the transaction,” he says. “What we give up is a tremendous amount of information about ourselves.”

Will users who jot to-do lists in Google Docs accept seeing ads that are drawn from their personal itineraries? Or would people accept a free Google phone if it allowed a digital voice analyzer to eavesdrop on their conversations to sell targeted ads—something that is very quickly becoming possible?

As Microsoft scrambles to catch up to its elusive rival, and begins to flex its muscles, there’s another question that Bill Gates &

Co. may help to answer: is Google really the most innovative, disruptive company of our times, or just a bunch of geeks with too much money to burn?

IN 2005, one ofMicrosoft’s top engineers told Ballmer that he was leaving to take a job at Google. According to Web lore, the CEO flew into a rage, threw a chair across the room and hurled no less than three F-shots at Google’s Schmidt while threatening to “kill Google.” Ballmer later said the inci-

dent didn’t happen that way, but it doesn’t really matter. For a long time it didn’t look like Microsoft had the wherewithal to follow up on Ballmer’s threat, anyway.

The analyst community has certainly tuned the company out. Of 40 equity analysts who regularly cover Microsoft, 15 recommend investors either “Hold” or “Sell” the stock, the Wall Street equivalent of a Bronx cheer. Almost as many analysts cover Google, but almost every one of them considers it a “Buy” despite its US$470 stock price and hefty valuation. And among software developers who have long lived in the shadow of Microsoft, the schadenfreude is palpable. “Microsoft is dead,” venture capitalist Paul Graham wrote in an essay that raged across the Internet in early April. He didn’t mean dead in the bankrupt sense. Just that the company no longer

‘Microsoft is dead.’ one critic wrote recently, but others say it’s too early to call the fight

matters. “They were like Nero or Commodus—evil in the way only inherited power can make you.” It is now assumed Google has usurped Microsoft, just as IBM’s incredibly cumbersome operating system gave way to Microsoft’s user-friendly icon-based pointand-click system.

But others think it’s far too early to call the fight. “Microsoft is certainly right to feel threatened by Google and regard them as a serious contender, but I still think all this talk of Google defeating Microsoft is a bit premature, maybe even a bit hopeful,” says Michael Desmond, an editor at Redmond magazine in Seattle, which focuses exclusively on the company. “Microsoft has always been caught fighting the last war, and a nimble opponent like Google could make some serious progress, until Microsoft wakes up.”

In March, Ray Ozzie, who replaced Gates

as chief software architect 10 months ago, said Google’s success with Internet advertising had been just that—a “wake-up call.” Ozzie’s task is to drag the lumbering giant into the Internet age. To that end the company has touted a strategy of offering online services to complement, rather than replace, the Microsoft software running on users’ computers. “Google’s point of view is that they can move everything online,” says Matt Rosoff, an analyst with Directions on Microsoft. “Microsoft’s view is that desktop software will continue to be important, but that they have to add more [online] services.”

Meanwhile, Microsoft has revamped its Internet search tool and brought its online services under the Windows Live brand. Microsoft says a major marketing push will be unveiled in the coming months in an effort to close the gap on Google. “This is a longterm battle for us,” says Adam Sohn, a spokesman for the company. “The thing about competing in Internet time is people think a year into the effort they want to declare the game over.”

But Microsoft’s biggest gun in this battle is its willingness to dip into its war chest. For example, last month, after much speculation, Google launched a voice-activated search service available through a 1-800 number. In turn, Microsoft has plunked down US$800 million for TellMe Networks, which offers voice-activated mobile search. In early 2006, Microsoft paid up to US$400 million to buy Massive, which develops advertising for video games. Then in February Google snapped up Adscape,

a start-up in the same field, for US$24 million. Last year Google created a health division. So in February Microsoft bought MedStory, a search engine dedicated to health care. Google may have won the battle for Doubleclick, which Microsoft desperately coveted, but the acquisition war is far from over.

Blow for blow, Microsoft is willing to dole out gobs of cash to match its more quickfooted foe. The strategy has angered investors who would rather see the money returned to them in the form of dividends or share buybacks. But Gates and Ballmer, the company’s two biggest shareholders, are sticking to their guns. Dividends, they argue, might have made sense when Microsoft looked like the unassailable titan of the computer world. But things can change fast in the information economy, and Google’s emergence shows they already have.

Which is why many analysts think a rival search engine company like Yahoo! or Ask. com is on Microsoft’s menu. Such a deal, involving potentially thousands of employees and vastly different corporate cultures, would be incredibly hard to pull off. But it would at least put Microsoft within spitting distance of Google in online ad sales and search rankings.

Whatever Ballmer may yell while he’s throwing around furniture, Microsoft isn’t yet in a position to inflict a mortal wound on Google. But the company is far more dangerous than people give it credit for.

If anyone thinks Google and Microsoft are powerful now, though, they haven’t seen anything yet. The amount of information currently available is piddly compared to the info-monster being brought to life in computer labs from Silicon Valley to Seattle. As the annual sum of new data reaches into the exabytes, zettabytes, yottabytes and beyond, experts predict powerful new search technologies will be unleashed capable of recognizing images and sounds, specifically faces and voices. As a result it will be easier than ever before for Web companies to create detailed profiles of Web users, not just of their tastes and interests, but their predilections and hopes, too.

There’s every reason to believe that Google, with its early lead, and Microsoft, with its huge resources, will be at the forefront of that massive information harvest. As they’re finding out in Quincy, it promises to be a bumper crop. M

If you think Microsoft and Google are too powerful, you haven’t seen anything yet