Greenlight Capital fund manager David Einhorn's recent comments on Microsoft are just about the smartest thing I've ever heard an analyst say about the company. Microsoft's quixotic obsession with Google is surely resulting in a poor allocation of their extensive resources.
Regardless of what some commentators might think, Google is hardly an obvious competitor to Microsoft. Microsoft's core market is desktop software, whilst Google's is search. If anything, they're complimentary rather than competitive business models. And to paraphrase Mark Twain (and Steve Jobs), reports of the death of client-side software have been greatly exaggerated.
Google's dominance in search has yet to translate into the much prophesied online "software as a service" model. On the contrary, client-side software seems to still be on the ascendent - witness the fuss made over the iPhone app store, and Android marketplace. Remember how people scoffed when Apple took the line of promoting web applications as an alternative to an SDK? Web apps may be neat, people reasoned at the time, but they're no replacement for a good old fashioned client-side app. The idea that the web would "become the OS" (whatever that means), is going the way of the "thin client" fallacy - an amusing piece of esoteric nonsense.
The fact of the matter is that even as the web goes from strength to strength, it looks less and less like replacing client-side software. Even with all the Google Web Toolkits, Google Gadgets and Yahoo! Widgets, the web does not look set to replace client-side software any time soon. Web apps like Google Docs and Photoshop.com are all very well, but they are regarded by most as a supplement to, rather than replacement for traditional applications.
So whilst Microsoft has been focusing on a phantom menace, what's been happening behind their backs? Well for one thing, the failure of Vista to gain popular support, and the success of Apple's "Get a Mac" campaign means that Microsoft has all but lost the argument in their absolutely core business of Windows desktop.
And developers are going crazy over competitor platforms like iPhone and Android, whilst Ballmer's "developers! developers! developers!" speech is now just a fond, distant memory. Microsoft's Office division has not come up with any innovations or significant new apps in years. And in some respects, their premium productivity suite is now seriously rivaled by Apple's budget iWork offering.
This is surely unforgivable. Windows and Office are Microsoft's crown jewels - and they need some polishing. Given the company's state of market dominance, something must be going seriously wrong to allow Apple to make these inroads.
Whilst Microsoft's eyes have been off the ball, Apple has built genuine competitors, not just to Windows Vista, but also to Windows Media, Windows Mobile and Windows Media Center. It strikes me that the key difference in approach between Microsoft and Apple of late is that Jobs has kept Apple very focussed - doing a small(ish) number of things very well - whilst Microsoft has devoted most of its senior management focus to the weakest areas of the business. They may have done better had they truly taken Ballmer's Developer! mantra to heart, and sold off their failing MSN division years ago.
But what of Google? Android has got a lot of press attention, but as far as I can see, this is more to do with the fact that Google is a backer, rather than anything intrinsically significant about the product itself. It is hamstrung by an ugly, clunky user interface, which lacks many key features. The product seems little more than an imitation of iPhone. In fact the only significant selling point for the product is that it is open source. But this alone is not enough - many Linux desktop distros have gone up against Windows, but none has gained a foothold. Being Open Source won't get you very far if you're not very good. As Nokia's CEO candidly observed, whilst Apple has rapidly become a 'credible competitor,' Android offers nothing new. And let's be honest, if Apple was seriously worried about the competitive threat that Android represented to iPhone, they'd ask Eric Schmidt to step down from his role on Apple's board.
Google's side-products tend to be side-shows rather than serious commercial enterprises. They have never risked taking their eyes off the ball when it comes to search & advertising. Microsoft, on the other hand, has allowed itself to be seriously outmaneuvered by Apple - a smaller competitor. And as a result, they now have a great deal of work to do to shore up their core markets.
In the meantime, the future still looks pretty rosy for Apple, who seem capable of grabbing an increasingly large slice of the home computer market, to compliment the enormous slice that they've already taken of the digital music industry.