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Stakes Rising As Microsoft Faces Off Against Google in ...Hypercompetition...

By Steve Lohr 
and Saul Hansell

Bill Gates, the chairman of Microsoft, described Google in an interview late last year as a worthy adversary, a company to test Microsoft’s mettle. “This is hypercompetition, make no mistake,” Gates observed.

The rivalry between the companies is growing more combative, and with good reason: The outcome is likely to shape the future of competition in computing and the way people use information technology.

A measure of how seriously Microsoft takes the challenge came last Thursday when it announced that its spending would rise sharply next year, about $2 billion higher than previous estimates. Much of the extra money, analysts say, is going to meet the threat from companies offering advertising-supported Internet services and software, led by Google.

“Microsoft doesn’t have to kill Google, but it has to narrow the gap,” said Richard Sherlund, an analyst at Goldman Sachs & Co. “It has to be in the same ZIP code.”

To succeed, Microsoft has to make strong inroads into Internet services and software, where Google is a leader. “It’s clear that if we fail to do so, our business as we know it is at risk,” Ray Ozzie, a chief technical officer, warned in an e-mail memo to Microsoft employees last year.

Microsoft enters that battle from a stronghold: its lucrative, powerful business in personal computer software. Google has asserted that Microsoft’s next Web browser typically steers users to Microsoft’s search service, limiting consumer choice and potentially hurting Google, the leading Internet search engine.

Microsoft says Google’s objections are mistaken, and that its new browser, Internet Explorer 7, increases a user’s search options.

But Google has advantages of its own, and the Internet services business is very different from the desktop software industry.

The Internet model is one that offers search, e-mail, calendar, contacts and even word processing as services accessible remotely with a PC or hand-held device with a Web browser. Typically, Google invents a new service or feature, makes it a free Web-based service, and only later figures out how to make money on it from advertising of some kind.

That ad-supported software, distributed as a Web service, is a threat to Microsoft’s model of selling licensed desktop software, at least in the consumer market. Corporations have so far shown less interest in ad-supported software as an Internet service.

To smaller software companies, Google’s strategy appears to have the same competitive impact as Microsoft’s tried-and-true practice of bundling more software programs and features into its Windows operating system.

Danny Sullivan, editor of Search Engine Watch, a Web newsletter, said that in some niches of the software business, Google is casting the same sort of shadow over Silicon Valley that Microsoft once did.