[Fwd: Microsoft's cash versus Google]

may 6th

interesting change as 'soas' (software as a service) comes into the
picture. the giant data center and electricity as the gating items!

-------- Original Message --------
Subject: Microsoft's cash versus Google
Resent-Date: Fri, 5 May 2006 20:56:07 +0000 (GMT)
Resent-From: rajeev
Date: Fri, 5 May 2006 16:57:21 -0400
From: CNNMoney.com: Fast Forward Newsletter <mailings@lists.cnnmoney.com>
To: rajeev

<http://ads.cnn.com/click.ng/site=cnn_money&cnn_money_brand=fortune&cnn_money_pagetype=email&cnn_money_position=728x90_email&cnn_money_rollup=technology&cnn_money_section=fast_forward>

The Internet home of:
Fortune </magazines/fortune/>Money </magazines/moneymag/>Business2.0
</magazines/business2/>FSB </magazines/fsb/> Subscribe to Fortune
<https://subs.timeinc.net/CampaignHandler/FOcc?source_id=24> | Free
Trial <https://subs.timeinc.net/CampaignHandler/foab?source_id=27>

CNNMoney.com </>
SYMBOL
LOOK-UP </quote/lookup/index.html>

HOME </>

NEWS </news/>

MARKETS </data/markets/>

TECHNOLOGY </technology/>

JOBS & ECONOMY </news/economy/>

PERSONAL FINANCE </pf/>

AUTOS </autos/>

REAL ESTATE </real_estate/>

SMALL BUSINESS </smbusiness/>

LISTS </lists/>

Friday
05. 5.2006
FAST FORWARD FORTUNE
Email usE-mail us <mailto:fastforward@cnnmoney.com>
Tell us what you think!

Microsoft's cash versus Google
The software giant's plan to build datacenters the size of 10 Costcos,
complete with electrical substations, signals a major shift in the
industry's fundamental economics.
By David Kirkpatrick <mailto:dkirkpatrick@fortunemail.com>, FORTUNE
senior editor

NEW YORK (FORTUNE) – The software industry is changing by the minute.
This once-ethereal, all-intellectual property business is starting to
seem like old industry, where advantage will come from physical assets
and capital spending.

Consumer software is increasingly taking the form of Internet services,
like Google <http://money.cnn.com/quote/quote.html?symb=GOOG> (Research
<http://cnnfn.investor.reuters.com/Reports.aspx?ticker=GOOG>), and being
paid for with advertising. Microsoft
<http://money.cnn.com/quote/quote.html?symb=MSFT> (Research
<http://cnnfn.investor.reuters.com/Reports.aspx?ticker=MSFT>) has
recently changed its strategy accordingly, as I described in a recent
story </magazines/fortune/fortune_archive/2006/05/01/8375454/index.htm>
in /Fortune/.

Its main growth plan now revolves around garnering more advertising -
where it badly lags Google. Its ad revenues are only about one-sixth
those of the search engine company.

But in order to deliver your software as a service, and thus be able to
display ads, as Google does, you have to spend unprecedented amounts of
money. Software is becoming a capital-intensive business.

The money must be spent to buy, build and manage the data centers that
are the heart of the Internet economy. Microsoft's Ray Ozzie told me
that the company would spend "staggering" amounts on these centers.

I believe Microsoft's strategy will increasingly be to seek to outspend
Google. Since Microsoft has $35 billion in cash, that may not seem too
difficult. But at the end of the first quarter Google had $8.4 billion
of its own. Then it raised another $2.1 billion in a secondary stock
offering. It is clearly concerned about having sufficient financial
resources. With each of its recent stock offerings, people have asked
why Google could possibly need so much money. The answer is becoming clear.

If you take the long-term view, as Ozzie is now tasked to do at
Microsoft, you can envision a world where most of the planet's 6 billion
people are online most of the time. And we will all likely be
communicating and being entertained with bandwidth-intensive video.

Vast data centers

In such a world, the data centers will be vast, many in number, and
loaded with servers, storage and switches. Such facilities will be so
energy-intensive that the primary cost of operating them will probably
be electricity. They thus will be, as Ozzie explained, located as close
as possible to inexpensive power sources like dams.

In the wake of the FORTUNE story, people starting putting two and two
together. /The Seattle Times'/s Brier Dudley wrote
<http://seattletimes.nwsource.com/html/businesstechnology/2002949703_brier24.html>,
"A few weeks ago, Microsoft paid $1.08 million for 75 acres, where it's
building three structures totaling 1.4 million square feet. That's about
the size of 10 Costcos."

The site of those structures is not far from the Grand Coulee Dam, the
third largest hydroelectric dam in the world. / The Quincy Valley
Post-Register/ reported last year that Microsoft said it could need 48
megawatts of power for the facility, and will build its own electrical
substation and transformer on site.

In Tuesday's /New York Times/, Steve Lohr and Saul Hansell wrote
<http://www.nytimes.com/2006/05/02/technology/02google.html> that there
is an arms race, evidenced by the unexpectedly higher capital spending
both Microsoft and Google announced in their most recent earnings
reports. Microsoft's estimated spending this year will be about $2
billion more than analysts expected, and Google will spend at least $1.5
billion this year. The/ Times/ story had a fascinating quote from Google
CEO Eric Schmidt: "Those machines are full. We have a huge machine crisis."

But it's a crisis the company is clearly working quickly to resolve.
Google itself last fall bought about 34 acres in The Dalles, Oregon,
with an option to buy 80 more. Nearby is The Dalles Dam, like Grand
Coulee a major power source on the Columbia River.

The changes Microsoft has to make to compete with Google are neither
easy nor certain to succeed. I recently spoke with Dan Scheinman,
Cisco's <http://money.cnn.com/quote/quote.html?symb=CSCO> (Research
<http://cnnfn.investor.reuters.com/Reports.aspx?ticker=CSCO>) senior
vice president for corporate development. Regarding Microsoft, he said
"You've moved from the tyranny of the application to this massive scale
of infrastructure - this is a disruptive change in the computer industry.

"Microsoft has to be willing to throw out everything they've done and
change religion from Catholic to Protestant. If they're willing to do
all these things, good luck."

My sense is that Microsoft's leaders have recognized they have to do
these things or lose out massively to Google and other providers of
software as a service, such as Yahoo
<http://money.cnn.com/quote/quote.html?symb=YHOO> (Research
<http://cnnfn.investor.reuters.com/Reports.aspx?ticker=YHOO>).

It's unclear whether infrastructure alone will be enough to give any one
of the giant Internet companies advantages over another. But this is an
arms race. Other companies could end up being left behind as the giants
battle for supremacy in the race for Internet infrastructure.

/Fast Forward is a weekly column by FORTUNE's David Kirkpatrick./

/Read this column online
</2006/05/05/technology/fastforward_fortune/index.htm>. / Top of page <#TOP>

LATEST NEWS
• Living in a real estate dead zone
</2006/05/03/news/economy/realestateguide_fortune/index.htm>
• Dow surge puts record in sight
</2006/05/05/markets/markets_newyork/index.htm>
• A FAST car that could save the planet
</2006/05/04/technology/business2_wrightspeed/index.htm>
• Lay and Skilling miss their marks
</2006/05/05/news/newsmakers/enron_handicaps/index.htm>
• Job growth: Weakest since Katrina
</2006/05/05/news/economy/jobs_april/index.htm>
• Takeover talk lights up Chinese Internet stocks
</2006/05/05/news/international/china_netstocks/index.htm>
• Sony's on a tear. It may not be over
</2006/05/05/markets/spotlight/spotlight_sne/index.htm>
• Google's Wi-Fi plans falter
</2006/05/05/technology/business2_thebrowser0505/index.htm>
<http://ads.cnn.com/click.ng/site=cnn_money&cnn_money_brand=fortune&cnn_money_pagetype=email&cnn_money_position=336x280_email&cnn_money_rollup=technology&cnn_money_section=fast_forward>
SIGN UP
Markets

* • Street Life
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Andy Serwer reports on Wall Street and breaking financial and
company news.
* • Sivy on Stocks
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Get investing strategies and stock analysis every Monday.
* • EyeOpener
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Get a jump on the trading day.
* • Market Briefing
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
A complete roundup of each day's trading activity.

Technology

* • Fast Forward
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
David Kirkpatrick specializes in information technology industries
and their impact on the way we work and live.
* • Working Tech
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Analysis of what works in technology.
* • Future Boy
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Erick Schonfeld on remaking business and the economy.
* • Third Screen
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Matthew Maier looks at cell phones, wireless gaming and media on
the move.

Careers

* • Ask Annie
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Anne Fisher answers career-related questions and offers helpful
advice for business professionals.

Retirement

* • Ask the Expert
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
Our readers toughest market questions answered every Friday.

Personal Finance

* • Five Tips
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
for saving and spending smarter -- every Monday, Wednesday, and
Friday.

Small Business

* • FSB Weekly
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>
A valuable resource providing national business coverage, polls
and business resources.

SUBSCRIBE NOW FREE!
<http://audience.cnn.com/services/money/newsletters/newsletter_add.jsp?source=money>

• Home </> • Portfolio
<http://bcportfolio.money.cnn.com/custom/cnnmoney-com/portfolio/view.asp>
• Calculators </tools/> • Contact us </services/bridge/contact.us.html>
• Newsletters </services/newsletters/> • RSS </services/rss/> • Press
Room </services/bridge/press.html> • Site Map </services/sitemap/>
• Advertise with Us </services/bridge/advertise.html> • Magazine
Customer Service </services/bridge/contact.us.html> • Datastore
<http://www.timeinc.net/fortune/datastore/index.html?fds> • Reprints
<http://www.timeinc.net/fortune/reprints/>
• Career Opportunities
<http://www.timeinc.net/fortune/services/careerops/> • Special Sections
<http://www.timeinc.net/fortune/services/sections/fortune/sections.html>
• Conferences <http://www.timeinc.net/fortune/information/conferences/>
• Business Leader Council <http://www.fortunecouncil.com>
* : Time reflects local markets trading time. † - Intraday data is at
least 15-minutes delayed. • /Disclaimer </services/disclaimer.html>/
© 2006 Cable News Network LP, LLLP. A Time Warner Company ALL RIGHTS
RESERVED.
• TERMS </services/terms.html> UNDER WHICH THIS SERVICE IS PROVIDED TO
YOU. • PRIVACY POLICY </services/privacy/>
Email Administrator
One CNN Center
Atlanta, Georgia 30303

This promotional message has been sent to you because you are currently
subscribed to Fast Forward.

This message was sent to you at rajeev
<http://cgi.cnn.com/cgi-bin/mail/clik?email=rajeev@ALUMNI.STANFORD.ORG&list=money-fastforward>