Steve Ballmer of Mircrosoft talks about the fight with Google and lays out the company’s plans for the future of search.

In an interview with the Financial Times Microsoft CEO Steve Ballmer gives credit to Google for seeing the potential of search at an early stage:

Didn’t see the business model of search

“I do fault us for the speed with which we dove into search, primarily because we didn’t see the business model. And I give Google credit for innovating in the business model around search. They did a nice job on that, and that’s why they won.”

Windows is to blame

Ballmer admits that Google has won this battle, and points out that the focus on Windows is partly to blame:

“I think one of the mistakes we made, and I think we’ve said this before, is having a five-year gap between Windows releases did calcify our ability to react to anything, because there was a five-year window basically where a big part of our R&D resources were fairly locked in. It doesn’t mean everything should be a six-month cycle, I don’t believe in that, but we’ve got to have more flexibility in our R&D commitments than that.”

Three things to do

As for the future, it seems that Microsoft finally has a plan as regards how to catch up and even excel compared to Google:

“I think we have three things we’ve got to do. There are some things that we just have to, as we say, ante up to be in the game: relevance, cap-ex, responsiveness. There are areas in which we’re going to differentiate and make Google play catch-up. And then there are areas in which we’re trying to change the rules. I think Google is going to have to decide whether they want to come with us. If this Live Cashback thing is successful, they’re going to have to decide if they want to play the game or not.”

The catch up part is a very sensible tactic, in our opinion. What Microsot (and Yahoo!) failed to take seriously, was the fact that users go to the search engine that gives the best results. Google does.

Live Cashback is hardly the answer

However, the Live Cashback service (where Microsoft pays a rebate to users who make a purchase after finding a merchant through Microsoft’s search engine) cannot be the answer to Microsoft’s worries. It may increase traffic and lure some new searchers to use their services, but those are not necessarily the kind of users most advertisers would like to see.

Live Cashback seems to us like an innovation made by old-fashioned economists, not by forward looking engineers or visionary people that understand future cultural trends.

It would make more sense to become better than Google in the next waves of searching — e.g. personalized search or the social web — and develop a coherent banding strategy. Now that the Yahoo! brand is out of Microsoft’s reach (at least for the time being), they have to develop something better than the confusing Live brand.

Google, a one trick pony

It is interesting to note that Ballmer is still not convinced that Google has a viable business model:

“I haven’t seen speed out of Google really. I mean, come on. They have one product. It’s been the same for five years – and they have Gmail now, but they have one product that makes all their money, and it hasn’t changed in five years.”

Ah yes, but quite a few companies have succeeded well with one major product. What if the common mantra of large diversified companies is not the only way to the heaven of large profits?

Ballmer, coming from a huge multinational company like Microsoft, does not see it that way:

“The reality is one product makes 98 percent of all of their money, search. Oh, they have two products, AdWords and AdSense. They have two products, both search-based, that make all of their money, and it hasn’t changed a lot in five years. I’m not giving them a hard time, but we’ve got to learn – if you say, what have you learned, we try to learn from people’s successes, not from people’s gestalt. The gestalt is yet to be proven.”

But Ballmer has a point: Google is vulnerable, to the extent that their revenue relies on search only.

Paradoxically this is also their strenght. A Ballmer points out in the interview (quote above), Microsoft’s failure in understanding search was the fact that it was too focused on Windows and software. Google could use all its creative juices on search, and succeeded because of this.

And why not let Paul Simon shed some light on the subject? In his song One Trick Pony, he writes:

He’s a one trick pony
One trick is all that horse can do
he does one trick only
It’s the principal source of his revenue
And when he steps into the spotlight
You can feel the heat of his heart
Come rising through

[...]

He makes it look so easy
He looks so clean
He moves like God’s
Immaculate machine
He makes me think about
All of these extra movements I make
And all of this herky-jerky motion
And the bag of tricks it takes
To get me through my working day

Google may have just one source of revenue, but they truly excel at what they do. Microsoft, on the other hand, with their bag of tricks, often come through as ungraceful and herky-jerky.

The battle in the cloud

Furthermore, Google is trying to diversify on the basis of already existing competences. Google is ahead of Microsoft in “the cloud”, or software as a service, i.e. programs run online, from Google’s own huge server park. This is a serious threat to Microsoft, as Google is moving the battle into Microsoft’s turf: Software.

Google Docs is no serious competitor to Microsoft Office yet, but in a few years time it will be.

Microsoft’s tactical thinking is so embedded in the operative system trajectory, that they have not been able to develop a strategy for an age where the operative system is of less importance, and where people will do most of their work on the web, including email, word processing and file sharing.