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Microsoft has historically had superior margins to Google. Google overtook Microsoft in sales five or so years ago. So for example in fiscal 2019 Microsoft had

Microsoft has historically had superior margins to Google. Google overtook Microsoft in sales five or so years ago. So for example in fiscal 2019 Microsoft had $42b in operating income, and Google had $35b in operating income in fiscal 2019 - that's despite Google doing $36b more in sales that year (not quite 30% more). For the last four quarters (excluding today's results) Microsoft has a ~41% operating income margin. Google by contrast has a 26% operating income margin (how much operating income are they generating from revenue). On Google's $282 billion in sales the last four quarters, their cost of revenue is equal to ~45% of revenue. By contrast, Microsoft's figure is ~32%. Microsoft has the far superior business imo. To say nothing of the risk that Google's core search business is about to get murdered by an AI inflection point that Alphabet screwed up (got lazy and extractive focused) and severely botched the transition on. For years Google has been too oriented toward financializing what they already had and they've been unwilling to try to kill off their own product by creating the future (the next search paradigm). It's pretty classic, the lazy monopoly gets capsized while resting on its laurels.

dougb5 4y ago
I agree with your assessment about Google's predicament and their laurel-resting-on, but I think it's a little early to say they're about to "get murdered". I don't see evidence from these earnings that ChatGPT has meaningfully hurt their search traffic, and it's been two quarters. If the murder is in progress then it doesn't show, and if the murder is yet to come then I think they still have plenty of time to react -- thoughtfully and carefully, I hope.
- adventured 4y ago
  I agree it's not a certainty at all. That's why I referenced the risk that it happens, rather than proclaiming it was definitely going to happen. Alphabet has mediocre leadership for this time and place. Sundar Pichai is to Alphabet as Ballmer was to Microsoft. Perfectly fine managers (both managed considerable expansions, courtesy of inherited momentum), but that's all they can do. They're the wrong types to have in charge during a critical tech inflection that threatens the overall business. Nadella was the right person to have in charge of Microsoft to make the needed changes; and despite being behind the curve due to Ballmer, they were still able to recharge Microsoft and right the ship. The sooner Alphabet gets rid of Pichai the sooner they can begin attempting to avoid the beating that is bearing down on their core business rapidly. They're going to have to be willing to cannibalize the Google business as needed and Pichai can't pull that off (and the founders are probably not remotely hungry enough to want to try to do it, to put in the sweat necessary, based on their last years in management there and how they left). Amusingly Alphabet is facing this threat similarly as Microsoft did, under the very bright lights of anti-trust. It's probably not far-fetched to say that if Ballmer had remained in charge for another 5-7 years, it might have been too much, too far gone to recover from (they would have missed the ramp to the next era by too much); I believe the same is true about Pichai and the present leadership at Alphabet, they can't do what needs to be done, and if the board/large vote holders wait five or more years to make the needed changes, it'll probably be too late to fully recover from.
kccqzy 4y ago
Search isn't getting replaced by LLMs. Hallucination is antithetical to search. But I am quite optimistic of the application of LLMs in other products like Office.
- mcphage 4y ago
  > Search isn't getting replaced by LLMs. It's possible that Google's search quality, which has already been trending down, completely nosedives when the internet gets filled to the brim with hallucinations.
- prepend 4y ago
  I’m not sure about that. I was recently talking about the 1918 flu with colleagues and we were trying to figure out the mortality rate. I googled for a few minutes and there were multiple references, and ads, and call out boxes but the mortality rate wasn’t clear. I asked chatgpt and in a single response it gave me the metric I was looking for and citations for me to check. It was a much better experience. I’ve also found I don’t need to google for programming questions as much and have fewer visits to stackoverflow. I don’t know if it’s going to kill search entirely, but it’s definitely a bad thing for search.
  - mcphage 4y ago
    > it gave me the metric I was looking for and citations for me to check Did you check the citations—that they existed, and said what ChatGPT claimed? It knows how to properly report metrics and format citations, but there's no guarantee that those metrics or citations are real, just because they're properly formatted.
albertopv 4y ago
These operative income margin figures are just insane.

dougb5 4y ago

I agree with your assessment about Google's predicament and their laurel-resting-on, but I think it's a little early to say they're about to "get murdered". I don't see evidence from these earnings that ChatGPT has meaningfully hurt their search traffic, and it's been two quarters. If the murder is in progress then it doesn't show, and if the murder is yet to come then I think they still have plenty of time to react -- thoughtfully and carefully, I hope.

adventured 4y ago
I agree it's not a certainty at all. That's why I referenced the risk that it happens, rather than proclaiming it was definitely going to happen. Alphabet has mediocre leadership for this time and place. Sundar Pichai is to Alphabet as Ballmer was to Microsoft. Perfectly fine managers (both managed considerable expansions, courtesy of inherited momentum), but that's all they can do. They're the wrong types to have in charge during a critical tech inflection that threatens the overall business. Nadella was the right person to have in charge of Microsoft to make the needed changes; and despite being behind the curve due to Ballmer, they were still able to recharge Microsoft and right the ship. The sooner Alphabet gets rid of Pichai the sooner they can begin attempting to avoid the beating that is bearing down on their core business rapidly. They're going to have to be willing to cannibalize the Google business as needed and Pichai can't pull that off (and the founders are probably not remotely hungry enough to want to try to do it, to put in the sweat necessary, based on their last years in management there and how they left). Amusingly Alphabet is facing this threat similarly as Microsoft did, under the very bright lights of anti-trust. It's probably not far-fetched to say that if Ballmer had remained in charge for another 5-7 years, it might have been too much, too far gone to recover from (they would have missed the ramp to the next era by too much); I believe the same is true about Pichai and the present leadership at Alphabet, they can't do what needs to be done, and if the board/large vote holders wait five or more years to make the needed changes, it'll probably be too late to fully recover from.

kccqzy 4y ago

Search isn't getting replaced by LLMs. Hallucination is antithetical to search. But I am quite optimistic of the application of LLMs in other products like Office.

mcphage 4y ago
> Search isn't getting replaced by LLMs. It's possible that Google's search quality, which has already been trending down, completely nosedives when the internet gets filled to the brim with hallucinations.
prepend 4y ago
I’m not sure about that. I was recently talking about the 1918 flu with colleagues and we were trying to figure out the mortality rate. I googled for a few minutes and there were multiple references, and ads, and call out boxes but the mortality rate wasn’t clear. I asked chatgpt and in a single response it gave me the metric I was looking for and citations for me to check. It was a much better experience. I’ve also found I don’t need to google for programming questions as much and have fewer visits to stackoverflow. I don’t know if it’s going to kill search entirely, but it’s definitely a bad thing for search.
- mcphage 4y ago
  > it gave me the metric I was looking for and citations for me to check Did you check the citations—that they existed, and said what ChatGPT claimed? It knows how to properly report metrics and format citations, but there's no guarantee that those metrics or citations are real, just because they're properly formatted.

albertopv 4y ago

These operative income margin figures are just insane.