Trading Microsoft Versus Google

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the release of Microsoft’s (NASDAQ: MSFT) Windows 8 grows ever closer, the potential for the once-industry-leading company to reemerge as a technology leader should not be overlooked. Likewise, Google (NASDAQ: GOOG) continues to quietly attract new corporate, government and individual users to the cloud computing solutions that are becoming a new industry standard. A comparison between these two juggernauts can be billed as “the old versus the new,” as “the grounded versus the cloud” or as “goliath versus goliath.” Regardless of how you title this fight, the way that business gets done is likely to be impacted by how developments from these two players unfold.

The Case for Microsoft

In an increasingly common position for Microsoft, it finds itself playing catch-up to the products of its competitors. The most recent Windows-based smartphones are simply an attempt by Microsoft to get in the game, rather than to displace either Android-based phones or Apple’s (NASDAQ: AAPL) iPhone from the top slots. Where Microsoft is poised to leapfrog its competitors is in the tablet market. Currently both Apple and Google tablets, and others, are primarily consumption based devices; they are great for reading books, watching video or shopping, but are rarely used for production. The Microsoft Surface and other Windows-based tablets have the potential to change this reality.

The “death of the PC” has become a Wall Street catchphrase that does little to accurately describe the change currently underway in technology. Particularly in the business arena, I know of nobody who has abandoned their PC in favor of a tablet for conducting day-to-day business. Reports are not written on tablets, complex spreadsheets are not designed and manipulated on tablets and financial software is not run on tablets.

What Microsoft seems to be intending with the Surface tablet is to create a bridge between the notebook and the tablet, bringing notebook functionality to the tablet form factor. This shift is similar to the jump from desktop to laptop and does not represent the end of the PC; it represents a necessary shift. While the next generation of tablets may have significant points of differentiation from the iPad and the Nexus 7, it is their similarity to current notebooks that will allow them to shift the market.

The Case for Google

The argument for Google as the ultimate winner of this battle can be summarized in two words: “cloud computing.” Through Google Apps, users have cloud access to Docs, Spreadsheets, Calendar and more. An increasing number of businesses, governments and individuals have switched to this format for the bulk of their business software needs. Cloud computing has the advantage of drastically reducing the infrastructure costs to those organizations that use these solutions as well as lowering overall software costs.

Not only does access to Google Apps cost less than licenses to traditional software, in most cases IT costs lie with Google rather than with the business. A study by independent research firm IDC revealed that for every $1 spent on enterprise software, the company spent $8 making it work over time. Cloud computing has the potential to make the rebirth of Microsoft described above unnecessary because as users move to the cloud, the need to recreate the notebook as a tablet may be overkill. Microsoft does offer many of its apps through Windows Live, but the company has done a poor job in getting this option to be readily accepted as it competes with the company’s traditional software business.

The Winner

As things currently stand, it is unclear which company will emerge as the long-term winner. The signs currently point towards Google as the likely victor given its increasing dominance in a variety of areas. Clearly the releases of Windows 8 and the Surface are critical in defining how Microsoft will move forward from here. If these events are as successful as I expect them to be, Microsoft should be able to position itself in a strong spot over the next few years.

In terms of investments, Google is an absolute must for every core portfolio and is a strong buy. Microsoft is less clear, but establishing a position ahead of the pending releases has significant upside potential, especially relative to the risk involved. There is likely room for both companies to succeed and should be room in your portfolio for both stocks.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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