Tech giants Microsoft (MSFT, $27) and Google (GOOG, $705) are locked in a multi-front struggle whose outcome will have enormous implications for the shareholders of both companies as well as technology customers around the world.  In many ways both companies find themselves at a vital crossroads: what to do when the cash cow upon which the organization is built comes under mortal threat?  The answer that both have settled upon, leveraging areas of strength to force their way into adjacent markets, is both uninspired and fraught with risk. 

The Roots of Strength

Microsoft

Microsoft was for a time the primary corporate beneficiary of the PC revolution.  The insight of co-founder Bill Gates that maximum profit could be generated from sale of the software that ran computers, rather than from sale of the computers themselves, was a simple but profound idea that led to a gusher of profitability that continues to this day. Using its strength in operating systems, first with MS DOS and then with Windows, Microsoft successfully pushed its way into productivity software, leading to the Office suite of products, as well as more high-end enterprise tools such as the Exchange, SQL Server, Sharepoint and Great Plains products.

Today the company boosts imposing financial health.  Revenue and cash flow came in at $73.7 billion and $31.6 billion for FY12.  Additionally, management has demonstrated a focus on returning cash to shareholders, with $10.7 billion returned in FY12 through stock buybacks and dividends.

Google

Google came of age at a fundamentally different time and in a different competitive landscape.  Whereas Microsoft’s management intuited where profitability would concentrate in the PC ecosystem and positioned themselves to reap maximum gains, Google entered a crowded market (search) that few thought was in need of improving and revolutionized it with a superior product. Google has demonstrated considerable earning power, with LTM revenue of $47.5 billion and operating cash flow of $15.9 billion.  Nonetheless, the company is considerably less diversified than Microsoft, with 77% of Q3 revenue coming from Google.com and Google’s network partners. 

Different Paths