Is Google Losing Its Innovative Edge?
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By Knowledge Wharton,
December 22, 2011

Apple CEO Steve Jobs once warned Google co-founder Larry Page that the search giant was dangerously close to becoming another Microsoft – that is, a company that was spreading itself too thin by trying to do everything. In Walter Isaacson's biography of Jobs, the late Apple leader recounted his advice to Page, who became Google's CEO last April: "Figure out what Google wants to be when it grows up. It's now all over the map. What are the five products you want to focus on? Get rid of the rest, because they're dragging you down. They're turning you into Microsoft."

Is Google becoming too bloated? In recent years, the company has grown from a search engine company to having a hand in a range of sectors including mobile, social media, cloud computing, digital music sales and more. Like Jobs, some analysts are beginning to speculate that Google's expansion will make it more difficult for innovative ideas to come to the surface.

How can Google avoid some of the missteps made by Microsoft during its rapid expansion? And what can the search company learn from Microsoft – which, after all, continues to be a profitable company despite charges that its size has made it less nimble in reacting to market changes and introducing game-changing products.

"Microsoft's great fear was always that it would turn into IBM, which it viewed as a bureaucratic organization living off of past glories," says Kevin Werbach, a professor of legal studies and business ethics at Wharton. "Google's fear is that it will become Microsoft, which it views as a company that wins through bullying rather than technical prowess. Microsoft became what it feared. Google's challenge is to remain open and innovative after achieving Microsoft-like domination of its core market."

Comparisons between Google and Microsoft began to surface soon after the search engine company went public in 2004. Both firms started out dominating in one area -- for Google, it was search; for Microsoft, it was the Windows operating system. By leveraging those core strengths, the companies were able to move into new markets. Google expanded into display advertising and later the mobile phone space with its Android operating system. Microsoft expanded into other software products, such as its Office word processing suite, and into the entertainment sector with its Xbox video game system.

The two are now competing directly on several fronts. Microsoft's Bing search engine hopes to steal market share from Google's dominant search service. Microsoft has also tried to expand into mobile with its Windows Phone 7 operating system. Wharton management professor Saikat Chaudhuri notes that both Google and Microsoft started out as engineering-focused companies. "Search is Google's Windows. The comparison between Google and Microsoft is apt," he says. "Both have become large incumbent players looking to new growth areas."

The Terrible Teens
But Google and Microsoft are at very different stages in their life spans. "Google is in its teenage years," Wharton legal studies and business ethics professor Andrea Matwyshyn notes. "There's a different tenor in the way [the two] perceive value creation."

In Google's initial public offering prospectus, co-founders Page and Sergey Brin outlined their "don't be evil" motto, which revolved around the idea that stakeholders "will be better served -- as shareholders and in all other ways -- by a company that does good things for the world, even if we forgo some short-term gains."

Since that letter, however, Google, like Microsoft before it, has drawn the scrutiny of antitrust regulators from the United States and Europe regarding Google's business practices and whether its dominance in the search market can be considered a monopoly. Microsoft dealt with a comparable situation in the late 1990s, when the company was sued by the U.S. Department of Justice and 20 states that alleged Microsoft abused its dominant market position in the way it sold operating systems and web browsers.

Testifying before a Senate subcommittee on antitrust on September 21, 2011, Google executive chairman Eric Schmidt argued that times and the technology market are much different than they were when Microsoft was grappling with similar issues. He also noted that Microsoft has integrated Bing into many of its products and brokered strategic deals to make it the exclusive search engine for sites such as Yahoo and Facebook. According to Schmidt, those efforts have generated speculation that the search engine "could overtake Google as early as 2012."