Gates: IBM, not Google, Microsoft's chief rival

Gates: IBM, not Google, Microsoft's chief rival

Summary: Microsoft has many strong competitors, and one of its weaknesses is fighting battles for market share on many fronts. Google is certainly a competitor in the online space, but so are Yahoo and AOL.


gates06.jpgMicrosoft has many strong competitors, and one of its weaknesses is fighting battles for market share on many fronts. Google is certainly a competitor in the online space, but so are Yahoo and AOL. Google just has a lot of momentum, which is reflected in its valuation and a somewhat irrational belief the that company is poised to deliver the next pervasive operating system, massive scale utility computing infrastructure, next-generation/Internet-centric applications, personalization done right, digital delivery of everything digitizable, personal computing and communicating devices, algorithms that crack the cosmic egg and a solution for global warming.

Gates identified IBM as the top competitor, according to a Reuters interview, quoted below.

"I'm never going to change the press's view about what the 'cool company' to write about is. That's Google, No. 1, and Apple, No. 2. Too bad for Nokia, Sony and all those others."

"The biggest company in the computer industry, by far, is IBM. They have the four times the employees that I have, way more revenues than I have. IBM has always been our biggest competitor. The press just doesn't like to write about IBM."  

Size matters, not market cap and press attention, Gates seems to be saying. Based on market caps around 1:30 PM EST today, Google is gaining ground, surpassing IBM.  

  • General Electric       $372 B
  • Microsoft                 $288 B
  • Google                    $132.5 B
  • IBM                         $130 B
  • Time Warner            $83 B
  • Apple                       $62 B
  • Sony                        $42 B
  • Yahoo                      $59 B

The value accruing to Google is certainly more of a concern to Microsoft than IBM. Gates is persistent and consistent is his view of Microsoft as a software company and that software is at the center of the enterprise, Internet and digital media revolution/evolution. Microsoft and IBM are going head-to-head in the enterprise across servers, databases and management software and platforms--Java/Linux/open source vs. closed .Net.

At the same time Microsoft is competing against Google and others for the very lucrative next-generation portal, application platform, digital delivery and ad/subscription-based business model. Google's valuation and escalating stock price reflect that generally accepted belief that future hypergrowth is in Internet-centric platforms. So, while IBM is Microsoft's chief competitor by far according to Gates, Google--not Sony, Apple, Oracle, open source, or brand X--has to be a close second and a great motivator for change at the company. At least, that's how Ray Ozzie, Gates' hand-picked CTO, thinks about his particular challenges. In October, Ozzie said that Google was a "great wake up call and rallying point for people in the company." No doubt, the wily Gates, with 30 years under his belt, is keeping a close watch the Googlers...

Topic: IBM

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  • Google is WAY over valued.

    Sorry folks but the numbers are the numbers.
    • And if you need proof...

      Look to the past. Lot of Tech companies with pretty decent market caps, and where are they now?

      Well, most have closed down, while the others that survived are now trading at a rate that more closely matches their actual sales.
      John Zern
      • So what are you saying...

        We should be short on GOOG? :) I'd agree...except I don't play in the options market.
    • Then again,

      so is Microsoft. A market cap on the order of 10x sales is unsupportable.
      Yagotta B. Kidding
      • I agree, Google has a similar price/earnings ratio to Microsoft

        In both cases, this seems to be a bad investment.

        release a lot of products, but few are successes. In fact, just two are cash cows (office and windows).

        release a number of products (mostly beta). The original search engine is the only cash cow.

        On the other hand, I still expect big things from Google, because of what is public knowledge over their direction.

        But I am unsure of what Microsoft is going to do. In my opinion, the days of the gas-guzzling V8 PC are numbered. The only real reason to have a top end one is games, and yet the PS3 console will be hard for gas-guzzlers to beat.
        Now that consoles are online, this is no longer a distinguishing factor for PCs, and it takes a lot more effort to install a game on a PC than put a CD in a games console.
        If microsoft made a flash based Windows Powered laptop ultra-light, ultra-thin, OLED based, with Wifi and maybe $200 then this would be a good product and would probably sell very very well.

        But of course, this would compete with Windows XP laptops and Windows Powered PDAs.
        This is the nature of Microsoft's dilemma. Most anything they do that is new will eat their sales in other areas.
        • On the contrary...

          "On the other hand, I still expect big things from Google, because of what is public knowledge over their direction."

          Inaccurate...we really don't know what Google's direction is. There has been much speculation. Nothing substantiated yet. The only real advantage they have - temporarily - is a large market cap that could enable them to buy their way into additional revenue streams. Highly risky - will they get that done before their market cap bubble bursts? Or not? They can't come up with "the next big thing" on their own quickly enough to justify the current P/E ratio and share price has to fall as a result, unless additional revenue streams are found pretty quickly. I give them another quarter...then I think you'll see the boom fall. This also depends on when the lock-in period for internal shareowners expires.
      • Valuations of GOOG and MSFT

        Actually the market cap/sales is 7 for MSFT and a whopping 26 for GOOG. If one wants to discuss unsupportable, one need only look at P/E ratio, where MSFT is 22.2 (the S&P average is approximately 15), but GOOG is 91.6-- that IS unsustainable!
    • Yeah, just look at all the suckers that got in at $85!

      The initial price for Google (GOOG) was $85 on August 19, 2004. Now (Jan 5, 2006), GOOG is valued at $451.24, feel pity for those stupid people! No one in their right mind (including you, who apparently missed the window) would want a stock that performs like that!
      • Yeah...but there's a hitch...

        IPOs generally have limited availability. There's usually a certain amount allocated to the dealer handling the IPO, and a certain amount available to insiders. You often have to contact the dealer ahead of time and get in a "raffle" for their allocation.

        So what does this mean? Mostly institutional investors and insiders get in on a popular IPO. Individuals generally are not going to win the raffle, or may not even know how to enter it. As a result, individuals often end up buying in shortly after the IPO, and pay a steeper price in the case of a hot IPO like GOOG. The insiders and institutional investors take the low-priced positions and sell off when it reaches the type of price we're currently looking at, and they're past their lock-in date.

        Most individuals aren't therefore *able* to reap those kinds of returns, unless your name is Carl Icahn or Warren Buffet.
        • Getting the stock after the IPO while below $100 would still have worked.

          Anyone who got the stock post IPO and before it broke $100 has made a lot of money (over 4.5 fold on investment) by now. Buying any stock is a gamble but the return for this one have been fairly respectable. The people who are whining now missed the window.
        • The Rich vs Poor plot deepens

          The free market world economy has long tilted to favor those with sizable capital available to enable them to get early IPO data which equates to a greater ability to maximize their position. The rich stay rich, while the rest of us scramble to snatch the carrot. Those of us who create a valuable product or service are still largely at a disadvantage to create true wealth, as the glass ceiling thickens. It's simply the way the wealthy protect their wealth. The rich may change, but true wealth is rarely divided up.
          • Microsoft's major competition

            I can not see how Microsoft is competing directly with IBM. IBM
            offfers reliable quality products and has withdrawn from the PC
            market. IBM is unlikely to offer commodity software that fails
            consitently and corrupts the entire computing environment like
            Microft product designs. There is no other computer software
            company in the Microsoft space which explains their success with
            such low quality problematic products. Apple appears to be a
            direct competitor but it does not have a commodity software base.

      I'm actually agreeing with NoAx on something? No way....

      I've thought the same thing for a long time. I don't understand the astronomical stock price for Google. IBM has 4x the employees of MS, and Google is about to pass IBM in market cap? Can you say "bubble"? It's exactly that: a tech bubble all in one company. I don't know how so many people bought into the hype...GOOG currently has a P/E ratio of 100.05 as of 1/5/2006 at 16:07 CST, at a share price of 451.24. Compare this to IBM's P/E of 17.41 at 16:10 the same day.

      Sorry folks, search and ads are only going to bring in so much money, and there are only so many ways to repackage those (ala desktop toolbar, etc. - already done). Google will need to come up with some big-time new products to grow its revenue. This is a must, in order to increase EPS. Otherwise the P/E cannot float much longer. It will take the next killer app to increase their EPS by enough to get that P/E in line. Realistically, new killer apps don't come along every year. Unless you really think Google has the ability to do something like that, and sees something that all the other innovators out there are missing, it should be pretty obvious that the price and market cap are going to take a hit over the next couple earnings reportings.
    • Numbers are numbers?

      Can you break that statement down further? Are you referring to the stats showing Google toppling IBM by $2.5B? GE was thrown into the mix to give us perspective, but they play another sport. Of software makers, MS has over double IBM's share. 1 MS = 5 Apples.
    • GOOG predicted to hit $1000 a share in a few years.

      Perhaps over valued, perhaps a market shift from desktop to services. Time will tell, though GOOG closed Friday at $465.66 (see: [url=]GOOG on Nasdaq[/url].
    • Numbers?

      You don't provide any, nary aeven a link. Another lame brain assertion from a mind that makes mencia's look reasonable and logical.

      Please note, Google has been rising through the "dot.gone" era, and has profits of the scarily good kind without recourse to any creative accounting.

      Please, explain why google is overvalued? Give some actual justification for your assertions. How do you assign a value to a company? Let us in on it, please?
    • Numbers?

      You don't provide any, nary aeven a link. Another lame brain assertion from a mind that makes mencia's look reasonable and logical.

      Please note, Google has been rising through the "dot.gone" era, and has profits of the scarily good kind without recourse to any creative accounting.

      Please, explain why google is overvalued? Give some actual justification for your assertions. How do you assign a value to a company? Let us in on it, please?
  • Size Matters Not

    I suppose everyone has already considered the predictable jokes about the name Sir Bill gave his company.
    Yagotta B. Kidding
  • Come off it NoAx

    Google sell advertising. Most everybody I know uses Google. If you say Google is overvalued, then you can also say Microsoft is overvalued, since no-one really needs a PC. I think comments like this are ignorant of human nature.

    Things have value only because humans want them.
    If apeman picks up a stick that for some reason is pleasant in shape, and apeman2 desires it despite all the hundreds of other sticks around, then this is what you're describing.

    Take for example the music industries' woes, and the movie industries' woes. This biggest reason for this is that people are buying games for games consoles instead. They get more entertainment. You can fight your way up the beach in Medal Of Honour over and over again, whereas Saving Private Ryan, you watch a guy doing it.

    If I get an Internet TV, I'll probably not be using any Microsoft software unless I go to Amazon (their system is built on .Net I think, but I'm not sure), but I sure will use Google. For me the Internet is unusable without Google.

    I was also surprised since christmas. I got a Sony Playstation 2, and it rocks big time versus the Xbox. The graphics of current games are pretty much as good or better than Xbox games IMOH. Technically this shouldn't happen, but I guess it's just people spending more money on squeezing more from the hardware.
    Also, Sony online gaming is as good as or better than Xbox live, and much much cheaper (free on annual basis). I got SOCOM seals with USB headset for 7GBP (in the US this will be $7). Even the USB headset is much better quality than the crappy Xbox one. IMHO SOCOM beats down Halo2 (online) easily. Skills are better matched, and the game is more interesting (eg: save prisoners).

    I have Windows XP, windows 98 on 4 PCs here at home, and Windows XP is a reasonable product. (I don't like the annoying overhead of supporting them though, ie: virus, adware etc etc).
    I have two Macs (one I'm going to sell I think).
    I might well build another old Windows 98 machine.
    But i can't see that I'll be getting a Vista machine soon at all.

    Also, I think that I might get a Playstation3 based on experience of the PS2 (the games are very very good), but I might well avoid the Xbox360: at some stage my Xbox hardware will die I imagine, and the Xbox 360 isn't compatible with a lot of the software.

    Like I said, the desirability of products feeds through to value of products, and the corporation manufacturing those products.

    A the moment, Google has very very strong products. I find that current and future Microsoft products are good, but not best of class. (eg: windows Xp is good, but the Mac doesn't require anything like the ongoing maintenance that windows requires, and for me, that's a killer feature).

    Why do I have some many older windows PCs? Well the kids are making pimped PCs at the moment, and we can put a whole system together with custom LED fans, Cold Cathode stuff, lazer cut fan covers for 30 GBP (in the US this would be $30) including screen. (This is a Win98 system though).
    Why Win98 and not linux? Unreal Tournament (original version), and free Shockwave games.
    • Good Points

      You make some good points here. It is true that most people don't watch a movie more than once. So then theatres, movie DVDs and TV movies all compete with each other, hence the different timings of any movie release on each of the medias.

      There used to be theatres that ran nothing but old movies, you don't see these so much any more. But I hadn't thought of games as competing for movie or music dollars, this could indeed be another reason for the claimed movie, music sales decline. It could be a quality of experience issue after all, in that games are just so much of a more entertaining experience than music or movies.

      I use Google almost exclusively, but I would say that the stock (not the product) is overvalued, as is also MS. Stock is an investment, and things like annual revenues / margins, company real assetts, forecast market growth, number of shares issued etc. should determine stock value, but unfortunately there are emotional factors called fear and greed. These can drive what people will pay, (not the real value) to illogical heights and depths.