More than 20 years ago, the U.S. Justice Department saw Microsoft Corporation (NASDAQ:MSFT) trying to “embrace and extend” its lead in PC operations to the Internet with its Internet Explorer browser, and a great antitrust saga was born. The result broke the monopoly. Microsoft found itself bound down with so many lawyers and PR people that it couldn’t make decisions, it couldn’t take risks, and MSFT stock was long hampered as a result.
Its fall through the early 21st century was precipitous, and sad. People still argue about what it meant.
Now, quietly, Google parent Alphabet Inc (NASDAQ:GOOGL) is trying the same thing, only the victim (if there is a victim) this time is Microsoft itself. Google Chrome is now the world’s dominant browser, on the desktop and in the mobile market.
GOOGL, which is making market headlines as it tries to eclipse the $1,000 per share level, is seeking to embrace and extend this into dominance of operating systems and applications. Through persistence, it is doing surprisingly well.
Google Is Good Enough
Google isn’t trying to match Microsoft feature-for-feature. Instead it is delivering “good enough” products that can do basic things but cost less, which is how you address a mature market successfully.
That starts with price-sensitive markets, such as education. Google Chromebooks are taking share here because Chromebooks are cheap and durable, and since they’re basically network clients, they’re upgraded and controlled remotely.
So far, most of these gains are in the U.S., where 58% of the mobile computers shipped to K-12 education last year were Chromebooks. It comes with a philosophy, “Googlefication,” conforming to the “in with the guide at the side” mantra teachers have been reciting for a generation now, ever since my own kids were in school.
Something similar is happening with GSuite, its application suite for business. It’s priced at $5 per user per month, compared with $100 per year for Microsoft Office 365, and files can be accessed through Google’s cloud, reducing the need to upgrade client hardware.
So far, GSuite has only a fraction of Office’s market share, but it is winning some big deals, like Verizon Communications Inc. (NYSE:VZ), with 150,000 employees. It doesn’t have all of Office’s features, but it doesn’t need them. Productivity applications have become a commodity.
All About the Cloud
Google has begun focusing more heavily on applications as part of its plan, under Diane Greene, to gain more traction in cloud.
Here, again, it’s a matter of embracing and extending. Google was a cloud pioneer but, until Amazon.com, Inc. (NASDAQ:AMZN) began gaining traction in renting its capacity as Amazon Cloud Services, it primarily focused on its own operations, not those of its customers.
Amazon seemed to be the focus when Google changed its cloud strategy last year, but taking pure infrastructure off the Amazon cloud looks like a bad play.
Instead of going from the bottom of the cloud up, GOOGL is going from the base user case, the fact that people “google” things. It stumbled on the potential of this with Android, which it gave away but defaulted to the Google search engine, delivering billions of dollars in ad revenue.
Adding the Chrome browser in 2008 led, eventually, to the Chrome OS and the Chromebook. Now the Chrome OS and Android are being aligned so that they work the same way, in the background, and the company is signing partnerships to take this to the enterprise market.
Bottom Line on GOOGL Stock
Advertising is going to dominate Alphabet revenue streams for some time, but the company is already seeing some serious acceleration from the new strategy.
In its latest 10-Q, Alphabet lists $3.095 billion in “Google other revenue,” against $2.072 billion a year ago. Some of that doubtless includes Google cloud rental, but the growth rate of 50% is impressive, and the top line of $3.1 billion would make executives at many companies gleeful.
For now, Google’s growth benefits Microsoft, which no longer must worry about the antitrust police looking off its shoulder. But that is going to change in a few years, assuming Google can maintain that 50% growth rate.
For now, keep both MSFT and GOOGL stock. But if you must sell one, sell Microsoft.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, GOOGL and MSFT.
