A little while ago, I wrote a two-part post on Microsoft’s irrational obsession with Google. Over the weekend, I watched a Science Channel program that detailed the background of Netscape and how it lost its battle against Microsoft. It was very interesting to observe the same kind of obsession and vengeance that Microsoft showed in that battle as it does today toward Google. That made me think: why was Microsoft able to defeat Netscape but not Google? Although Google does have plenty of Ph.D.’s as employees, it seems implausible that Microsoft simply doesn’t have employees smart enough to catch up.

There may be many reasons to explain this historical difference. For example, one may argue that Microsoft was distracted by its anti-trust case when Google was quietly gaining its strength. In my mind, however, one crucial reason was the fundamental difference between Google’s business model and that of Netscape.

As a traditional software business, Netscape relied on making money off its software. Therefore, when Microsoft offered its Internet Explorer for free, it immediately crushed Netscape’s fundamental business model. Google, on the other hand, offered its service to the average consumer for free and instead drew its revenue from businesses/advertisers. By doing so, it defeated the advantage Microsoft had: the deeper pocket. No longer can Microsoft use its free bundling and distribution power against Google. As its service is accessible over the Internet at no cost, Google was able to start on the same footing as Microsoft, and the deeper pocket Microsoft had could not help the company in this case.

The lesson learned from this is that, when businesses face a formidable rival, too often it’s easy to focus on what the competitor has that one does not have. But as Google’s luck shows, the best way to take down a larger rival is by rendering whatever advantages the larger rival has useless. Of course, this is built on the assumption that the company can still find sources of competitive advantage in an alternative area. What essentially happened in Google’s case was that they changed the rule of the game, and by doing so, it diminished Microsoft’s market power.

Last year, ComputerWorld published an article on the top eight corporate sites in Second Life. The rankings are: 1. IBM; 2. Pontiac; 3. Sun Microsystems; 4. Dell; 5. Reuters; 6. Cisco Systems; 7. H&R Block 8. Best Buy Geek Squad.  It’s not difficult to see from this list that many of these companies are in hi-tech industries.  Some may argue that these firms are more engaged in Second Life because they have the skills and resources to.  While this is probably true to some extent, I think there is another much more important reason for these firms’ SL investments: to be ahead of the learning curve for the next-generation 3D Internet.

Second Life is most well-known for the ability of individuals to take on an alter-ego in the form of an avatar.  While this concept is appealing to some people, others also find the concept laughable.   But the much more universal appeal of Second Life comes from the 3D virtual reality of the environment.  Currently the Internet is dominated by textual information (such as this blog), with multimedia added here and there.  This is NOT a “normal” way of experiencing things or interacting with other human beings.  What Second Life demonstrates is a more realistic environment where individuals “walk” and “touch” like they do in real-world, if not quite yet, it will be that way soon.

The implications of this new way of presenting information in a connected Internet is huge, from new product development, marketing, to basic business operations.  Yes, many still complain that Second Life platform requires too much computing power.  But that’s similar to the difficulty of watching video online before broadband becomes popular.  As computing power increases according to Moore’s Law predictions, the platform will eventually become a piece of cake for most users’ computers to handle.  Or if the Second Life Grid (the platform underlying Second Life) is not the best way to support 3D virtual reality, someone else along the way will come up with a better way of doing that.  It’s just a matter of time.

For hi-tech companies, this potential shift represents another significant wave of change since the birth of the Internet.  The structure of today’s online environment may become obsolete under the new system.  Rather than being sitting ducks waiting for the wave to push them along, smart companies have already taken on this learning task and have championed in this yet unknown territory, on the surface for marketing reasons but deep down for much bigger revolution of business ideas and processes.

In Part I of this two-part series, I discussed the irrationality in Microsoft’s obsessive pursuit of Google. In this part, I suggest some of the opportunities that Microsoft may want to pursue instead:

1. The mobile market: The mobile market is still in its infancy. This is an area that Microsoft did make some early headways through its Windows Mobile platform. Google is quickly catching up by developing its own mobile applications. But jury is still out on who is going to win the mobile market. Microsoft needs to think much harder about what it can do in this market.
2. Instant messaging: Despite the launch of Google Talk and Gmail chat functionality, Microsoft’s Windows Live Messenger (formerly MSN Messenger) still has a much larger share of the instant messaging (IM) market. As IM technology is closely tied in with social networking and the mobile market, Microsoft can leverage its position in the IM market into these other fast-growing areas.
3. Platform-free internet-based applications. Google’s array of innovative software and online service solutions are moving computing toward a platform-less environment. This can significantly undermine the foundation of Microsoft’s business. In my opinion, this is a much bigger threat than the search market. To adapt to this change, Microsoft should work on moving its products to a common Internet platform. Rather than spending all the energy on preventing illegal use of its software, Microsoft will be better off taking a stronger lead into developing Internet applications that are not tied in to its Windows platform.

No matter how bad of an image Microsoft may have had in the last few years, we have to acknowledge that the company did play a significant role in computing history. It may still be able to continue its legacy if it could un-blind itself from Google.