Google This, Microsoft: Cheap, Innovative ApplicationsGoogle This, Microsoft: Cheap, Innovative Applications

One of the most telling comments from our recent interview with Google CEO Eric Schmidt, and one that hints at why Google will be an ongoing problem for Microsoft, was this: "It seems like a no-brainer," Schmidt said of a plan to put more of Google's Web-site capabilities into appliance devices that can be deployed in business environments. "You have lots of these things sitting around inside all these [companies'] networks. Just think of the strategic value of that to Google." It was an interesting choice of words.

Schmidt hasn't gone into detail on how Google intends to make money in the business-technology market, but it clearly involves extending the company's ad-placement model inside company firewalls. Schmidt seems less interested in the margins of hardware appliances than in the windfall to be made delivering ads to the world's most sophisticated computer users "- all those professionals glued to their PCs during the work day.

"The person who is ultimately the customer here is inside a company," he said during our interview. "On a general basis, they're more highly paid than the average customer. They do more searches. They're a better advertising target. It makes perfect sense to me that you should do this even if you weren't making money, which isn't the case. You would be willing to lose money in this business for the strategic leverage that it gets you to reach those customers. They are the power users."

It's a philosophy Bill Gates and Steve Ballmer know well enough. Microsoft has been willing to invest in money-losing businesses because of the long-term opportunities they represent. The difference is that Google's ad-revenue model makes business technology a good place to be even if profits from appliances don't account for much. So, Google can afford to sell its appliances, and the applications bundled with them, at bargain-basement prices. (See Heart Of The Search.) As a point of comparison, Microsoft charges $500 per desktop for its Office Pro applications, on top of the licensing fees it gets for Windows. Google's apps don't compare with all that's loaded into Office today "- Word, Excel, PowerPoint, Outlook -- but that could change over time as Google continues to spin out more and more innovative new capabilities. Therein lies the worry for Microsoft: A competitive applications suite with novel new features at a fraction of the price.

At the same time, Google's Schmidt should be wary of a value proposition that puts his own company's interests ahead of its customers. "Just think of the strategic value of that to Google," he says of the push into corporate computing. That orientation could be the loose thread in Google's approach "- innovation so closely tied to ad placement is serving the wrong master. What Schmidt needs to be able to say is, "Just think of the strategic value of that to our business customers."

When Google's CEO can utter that phrase with conviction, the true face-off with Microsoft over the business desktop will begin.