The Japanese martial art of Judo involves winning a fight by using your opponent’s weight and strength as weapons against himself, emphasizing that that good technique and strategy can defeat sheer strength. Satya Nadella, the CEO of Microsoft, was playing a judo move when he remarked in a recent interview, “I hope with our innovation they (Google) will definitely want to come out and show that they can dance. I want people to know that we made them dance.” This was the same day that Microsoft and OpenAI launched an updated version of the search engine Bing, which combined ChatGPT’s generative AI abilities with traditional search. Nadella announced that it a ‘new day’ in search, openly challenging the “800 pound gorilla”, Google, and initiating the next round in their War over Search.

Fifteen years back, I was a part of Microsoft, leading MSN and MSN Search (later called Bing) in India. The then CEO, Steve Ballmer, had announced a search war, sorely tempted by the torrid growth and immense margins that Search had started generating for Google. The war was overwhelmingly won by Google, with a 95% share of global search advertising. Fast forwarding to today, Google’s search business generates $225bn revenues, dwarfing the $10bn of Microsoft Bing. With 8.5bn searches a day, Google has the advantages of massive network effects, superior infrastructure and technology, and a brand which has become synonymous with search. It has also developed a business model which is often called the best business model of any business ever on this planet. Microsoft has dug in its heels and soldiered on, but does not have much to show for it, with a 3% to 5% market share and poor revenue growths.
Until now that is.

Satya did two smart judoka moves. One was the foresight of spotting OpenAI’s innovation and building a deep relationship with them, with an investment of $1bn (and, reportedly, another $10bn more recently), building out a ‘supercomputer for Generative AI for OpenAI on its Azure cloud, and fostering a close personal relationship with OpenAI CEO Sam Altman. The second was to move at a blinding speed to integrate ChatGPT into all its core properties – Bing, 365, Azure and others. The sheer speed shocked and awed even the most jaded of Silicon Valley pundits and has put Google and its CEO, Sundar Pichai, on an uncharacteristic backfoot.
The game that Microsoft is playing is not about just taking share in Search or trying to dethrone Google – in fact, a ChatGPT like model will not really replace Search. Nadella, as a commentator said on Twitter, is “playing 3D chess”. Search is not Microsoft’s main business, it makes gobs of money from its software, the cloud and gaming businesses. Its search revenues are minor at 5% of its total, but for Google, it is the opposite, with search advertising contributing 80% of its total revenue and almost its entire profitability. All its other big businesses lose money, Google Cloud lost $480mn in in Q4 2022. Nadella is not necessarily targeting search leadership, he is squarely aiming for Google’s search margin.

He said as much in an interview with Financial Times: “From now on, the [gross margin] of search is going to drop forever.” Sydney, the Bing/ChatGPT combination will help take some share from Google, they will likely also subsidize advertisers to any extent it takes, since Microsoft has nothing much to lose. Again, Nadella referred to this in his FT interview, saying “There is such margin in search, which for us is incremental. For Google it’s not, they have to defend it all,”. It is this “asymmetric” competition which is enabling Microsoft’s judo move. With Microsoft pushing overall search margins down, it hits Google asymmetrically. That potentially impacts Googles investments in other businesses, including for its cloud where it is battling Microsoft for the number two position. Google subsidizes its cloud growth through its search cashflows, and that tap could dry up. Microsoft continues making money through its software and gaming businesses, offsetting its miniscule search losses. Google is also at a weak moment with regulators across the globe, including in India, and they would welcome a heavyweight competitor. This is the ’3D chess game’ that Microsoft is playing, something that Sun Tzu with his ‘Art of War’ would be proud of.
It would be foolish to underestimate Google. It has world-beating AI capabilities too; its Search labs were the ones that invented transformers before OpenAI and GPT3. It owns DeepMind, the best deep learning company in the world. It has had a ChatGPT like product much earlier, LaMDA, which will now be called Bard. Recently the Web is abuzz with Microsoft’s Sydney going off the rails, and Microsoft might yet pull it back, giving some respite.

Google, however, is also stuck in the infamous Innovator’s Dilemma. Its advertising business model works well on the current structure of Search; it might not work as well as in conversational search. So, Google might have a vested interest in ChatGPT or Bard like conversational search not succeeding, the classical innovator’s dilemma.

Microsoft might have another trick up its sleeve. The real battle for Search is on the phone and Google owns Android. But it also pays a reported $15bn every year to Apple to be the default for iOS. That contract is up for renewal soon, and it would not surprise me if Microsoft upped that to, say, $25bn to take Google off. Again, their money comes from elsewhere where there is no competitive threat from Google, but for Google to pay $10bn more hits their search profit margins, precisely what Satya wants!

Marketers and digital advertisers among you would be familiar with what was called Google Dance. This was the famous weekly tweaks that Google would do to make sure it worked well and constantly adjusted its ranking with the ever exploding World Wide Web and new forms of content. Perhaps Nadella remembers that too, as he talks of the new Google Dance, the one he wants them to do with his Bing/ChatGPT innovation.