Competing on Business Models: Google vs$.$ Microsoft

Rivals often use different business models to compete with one another. Because of competitive dynamics and industry convergence, Google and Microsoft progressively move on to the other's turf. In many areas, Google and Microsoft are now direct competitors. ln $2014,$ Microsoft had $$90$ billion in revenues and Google

$$66$ billion. Although Google started as an online search and advertising company, it now offers software applications $($Google Docs, word processing, spreadsheet, e$$ mail, interactive calendar, and presentation software$)$ hosted on the cloud $($Google Drive$),$ and also operating systems $($Chrome OS for the web and Android for mobile applications$),$ among many other online products and services. In

Contrast, Microsoft began its life by offering an operating system $($since $1985,$ called Windows$),$ then moved into software applications with its Office Suite, and later into online search and advertising with Bing as well as gaming with Xbox One. Both also compete in mobile devices by offering smartphones. The stage is set for a clash of the technology titans.

ln competing with each other, Google and Microsoft pursue very different business models, as detailed in Exhibit MC$15\mathrm{.}1.$ Google offers its applications software Google Docs and hosting service Google Drive for free to induce and retain as many users as possible for its search engine. Although Google's flagship search engine is free for the end user, Google makes money from sponsored links by advertisers. The advertisers pay for the placement of their ad on the results pages and each time a user clicks through an ad $($which Google calls a "sponsored link$1).$ Many billion mini transactions add up to a substantial business. Exhibit MC$15\mathrm{.}2$ shows how advertising revenues account for some $90$ percent of Google's total revenues.

Google uses part of the profits earned from its lucrative online advertising business to subsidize Google Docs $($see Exhibit MC$15\mathrm{.}1).$ Giving away products and services to induce widespread use allows Google to benefit from network effects$$theincrease in the value of a product or service as more people use it$.$ Google can charge advertisers for highly targeted and effective ads, allowing it to subsidize other product offerings that compete directly with Microsoft.

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Microsoft's business model, however, is almost the reverse of Google's $($see the opposing arrows in Exhibit MC$15\mathrm{.}1).$ Initially, Microsoft focused on creating a large installed base of users for its PC operating system Windows. It holds some $90$ percent market share in operating system software for personal computers worldwide, although the PC has become less important as mobile devices have become more important in recent years. Roughly $60$ percent of Microsoft's profits are tied to the Windows franchise. Moreover, PC users are locked into a Microsoft operating system that generally comes preloaded with the computer they purchase;

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$$they then want to buy applications that run seamlessly with the operating system. The obvious choice for most users is Microsoft's Office Suite containing Word, Excel, PowerPoint, Outlook, and Access. But they need to pay several hundred dollars for the latest standalone version. More recently, Microsoft offers "rental" of its cloud$$based

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Office $365$: $$it costs either $$99\mathrm{.}99$ a year, or $$9\mathrm{.}99$ a month. Exhibit MC$15\mathrm{.}3$ details Microsoft$$s revenues by business segment.

$1.$How is strategy different from a business model? How is it similar?