How do you plan to compete with Google or why do you compete with Google? That is a question we get asked very often. It is better to ask why Google is interested in the business software market. Let me explain with a spreadsheet.
Focus on the revenue per employee and profit per employee metrics. I have grouped together the business software industry and the consumer internet industry separately. Notice how very successful companies with mature business models like Oracle or Intuit don't even pull down half the revenue per employee of Google, and perhaps surprisingly, they pale in comparison with the supposedly struggling Yahoo. Ebay also towers over every software company except Microsoft. Finally, even Microsoft falls short of Google's revenue/profit per employee metrics - and Google isn't even milking a mature monopoly.
Salesforce.com is very instructive. Though it likes to pass itself off as an internet giant, its revenue per employee is only in the range of its business software peers, and is a fraction of the real internet giants - I know an internet giant when I see one, and you ain't no internet giant, Salesforce ! This, I must add, despite their out-of-this-world pricing for their CRM subscriptions. They pull in almost $1 billion in revenue on the backs of - those are some really overloaded backs - a little over 1 million users, leading to almost $1000/user/year.
Now it is clear why we compete with Google. Google is perhaps the most stunning technology success story ever, but we simply don't believe Google has the rational business incentive to get too deep into the business/IT software category. The lower revenue and profit per employee figures would be tolerable if there were huge growth opportunities there, but when very successful companies like Adobe and Intuit pull in revenues well shy of a Yahoo, when even the enterprise software leader SAP is smaller, and slower growing than Google (Google makes nearly as much in profit per employee as SAP or Oracle Salesforce make in revenue per employee), it is fairly clear this market is not going to make a material contribution to Google's growth and profitability objectives. So what is Google's plan here? It is fairly obvious they are in it to put Microsoft on the defensive on its home turf, so that Microsoft's offensive capability in the internet is diminished. It is also perfectly clear why Microsoft wants to be an internet player - as Google has shown, it is a higher margin business even than its monopoly-profit core business.
So why is business software so much less profitable than the internet? I can think of two reasons: a) purchasing departments that know a thing or two about supplier margins and specialize in putting the squeeze b) sales and support costs, particularly support costs. When you sell software to businesses, they have all kinds of support expectations, which adds to headcount. A search engine or a news portal isn't expected provide any customer support.
Another conclusion that leaps out is that within business software, companies that sell to small and mid-sized businesses, such as Adobe & Intuit (Microsoft is also very strong in SMBs), have higher revenue per employee than companies that focus on large enterprises, such as Oracle or SAP. This is likely due to SMB-focused channel strategies leading to "outsourced" selling.
When push comes to shove - and there is a lot of very messy push and shove in the business software market - Google's resources are going to flow into figuring out how to monetize the humongous traffic of YouTube or compete in online auctions, rather than figure out a way to squeeze a bit more margin compared to Oracle or Adobe or Salesforce. That may explain why Google has been silent on CRM, Project Management, Invoicing or HR type of tools, because those markets don't offer the profit potential they already enjoy.
(Update: Dan Farber's take here)