Not so long ago, marketers and search engine optimizers avidly watched something called Google Dance. As the World Wide Web constantly expands with new websites, and pages are added and some removed, Google’s famous search algorithm is constantly adjusting its rankings. It crawls these pages, assesses their relevance, detects fraud, and changes the way sites appear on its page. It’s called the Google Dance.
I thought about this recently when Satya Nadella, the CEO of Microsoft, revised the definition of Google Dance, saying in a interview, “I hope that with our innovation, they (Google) will definitely want to come out and show that they can dance. I want people to know that we made them dance.” It was the day that Microsoft and OpenAI launched an updated version of the Bing search engine, which brought the amazing generative AI capabilities of ChatGPT into traditional search. Nadella called it a “new day” in research, throwing down the gauntlet to the “800-pound gorilla” and sparking the second research war.
The first search wars began 14 years ago, when Steve Ballmer and Microsoft launched the Bing search engine to take on Google. Google had wiped out other search engines like Yahoo, Lycos and Excite to become a virtual monopoly, thanks to a combination of superior search results and a for-profit business model.
Much like World War I, the Bing-Google search war was an uphill battle fought in the trenches of technology. Google emerged victorious, still controlling more than 90% of the search market, in addition to overtaking Microsoft in terms of revenue and profitability. Microsoft has sworn to persevere, and Bing still exists, despite being a very bad second alternative. Hence, the undisguised joy in Nadella’s tone when he declared the second search war.
World War II began with a blitzkrieg waged by the Germans as their tanks and artillery rolled into several European countries, the execution and speed of which astounded the world.
Microsoft kicked off the search wars with its own blitzkrieg, as it quickly integrated OpenAI’s revolutionary ChatGPT into its properties – Bing, the Azure cloud, Github and its core Office software. He had patiently invested and partnered with OpenAI since 2019 and helped them develop their innovative products; recently, it upped the game with a $10 billion investment. Patience pays off, with the pace and scale of its execution taking the tech world by surprise. Tech experts are gushing about how startups could learn from Microsoft’s agile execution.
The game Nadella and Microsoft are playing is not just about winning in search; in fact, a ChatGPT-like model will never replace search. Google’s $225 billion search business revenue eclipses that of Microsoft Bing more than 20 times. With 8.5 billion searches per day, Google benefits from massive network effects, superior infrastructure and technology, and a brand that has become synonymous with search. It also has formidable AI capabilities – its vaunted research labs actually “invented” processors before OpenAI and GPT3, and it owns probably the best deep learning company in the world, DeepMind. He’s had a ChatGPT killer with him for several months now; his LaMDA or Language Model for Dialogue Application will soon be reborn as Bard. While Microsoft would certainly love to claw back some market share from Google – every percentage point of share is worth billions of dollars in revenue – its game goes further.
Satya Nadella, as commentator said on Twitter, it’s “playing chess in 3D”.
At the heart of this game is the fact that search isn’t Microsoft’s core business – it has hugely profitable, market-leading growth businesses in enterprise software, cloud, and games. Its research revenue is only about 5% of its total revenue. For Google, it’s quite the opposite, with search advertising contributing 80% of its total revenue and almost all of its profitability. His other big businesses, like cloud, are very likely to lose money — he lost nearly half a billion dollars in Q4 2022. That’s the big search revenue stream that’s driving its investments in other businesses, primarily the cloud.
Search advertising is hugely profitable for Google, and now Microsoft wants to attack it outright. Nadella said so in an interview with FinancialTimes: “Now the [gross margin] search will drop forever. “Innovation from OpenAI, combined with the hyperscale of Microsoft’s software products, will allow it to take users from Google. It will also subsidize advertisers to any degree, it has nothing to lose.” Nadella alluded to this in his interview with FT, saying: “There’s such leeway for research, which for us is progressive. For Google, it’s not, they have to defend everything.” It’s this “asymmetrical” competition that enables Microsoft’s jujutsu movement. As Microsoft slashes overall search margins, it hits Google asymmetrically. This potentially impacts Google’s investments in other businesses, including cloud, where it’s locked in a fierce battle with Microsoft for the No. 2 position.Google has subsidized its cloud growth with its search profits, and that faucet might dry up. Meanwhile, Microsoft continues to make money from its software and games business, making up for its tiny research losses. It’s the “3D chess game” that Microsoft is playing , a stroke of genius in strategy.
For Google, the famous innovator’s dilemma could also be a downside. Its world-class advertising business model works well on how search is structured today – as a massive searchable database of information. If search becomes more and more conversational, it is not sure that it can be monetized in the same way as current search. So Google has a vested interest in ensuring that ChatGPT or Bard-style conversational search doesn’t take off – the classic innovator’s dilemma. Finally, now is not the best time for Google, as regulators and governments around the world surround it in an attempt to reduce its near-monopoly in multiple areas of technology. It would welcome and encourage competition.
While fascinating to watch, there are many factors that could derail Microsoft’s ambitions. As I said earlier, you should underestimate Google at your peril. It has vast resources, talents and innovations. Additionally, products like ChatGPT may be a flash in the pan, and the initial excitement might yet die down. Then the real wars will be in the mobile space, where Android dominates and Google also powers search on iOS. Finally, generative AI models will have huge ethical issues like bias, plagiarism, generation of fake news, environmental degradation, etc., which could slow them down and even kill them. While Satya Nadella seems to be emerging as a jujutsu champion, Sundar Pichai might still be the sumo wrestler who remains undefeated and standing tall.