Why GOOG and MSFT Are Behaving They Way They Are

Posted: January 6, 2006 in Uncategorized

I recently got in an email conversation with a financial journalist about why GOOG and MSFT are behaving the way they are (i.e., MSFT is treading water while GOOG is going straight up).

Thought you’d enjoy the note.

 

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Hmmm, not sure it’s fickle.  I mean, it’s not like Microsoft has been standing still, they’ve had amazing rev growth over the last five years for their sized company. 

But, Google is going to be a $20 billion company before anyone knows it… and that’s what the market is valuing.  

The interesting thing about the Bill Gates announcement a month or so ago (the Windows Live stuff) is Microsoft’s now "enlightened" commitment to the ad market.  

To put it in perspective:

The top 500 companies in the enterprise software mkt do about $310 billion… don’t get me wrong, I think there’s plenty of new, innovative growth that can be gotten here… but one can also argue that Microsoft can’t sell 10% more Word’s because it already owns 98% of anyone that would buy the program.

But, the overall ad market is $400-$600 billion and online has only taken about 2-3% to date (or something like that)… in other words, the fastest way for Microsoft to get to $80 billion in revs is to fight-like-hell to capture 10% of the overall ad market… a completely new, virgin market (so to speak).

GOOG, YHOO, and, yes, MSFT will reap amazing benefits transitioning the world from traditional to online advertising.  

I spoke with Mary Meeker at a conference about this and she said (unofficially) that online should take 15% of traditional advertising "falling off a log" in the short run (more when truly interactive TV hits!).  

In other words, GOOG, YHOO, and MSFT will be primary recipients of $60-$90 billion relatively shortly.

Investors don’t quite understand the actual magnitude of this but in GOOG’s case "b-e-l-i-e-v-e"… to a lesser but still great extent investors "believe" for YHOO, too.  But they don’t see it yet for MSFT… which is why I think MSFT is stuck… investors can’t see this growth driver yet.

Sure, Vista and Office releases are great but will only help keep the current businesses chugging along.  (Which, by the way, every business in the entire world would *kill* to have.)

And, Xbox is doing *phenomenal* things in the market but it’s only going to get a portion of a $25 billion market.

No, the real growth in MSFT’s future is the *massively* big and brand new online advertising mkt.  BillG finally realizes it.  Investors haven’t, though.  Should be interesting when they do.

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