Software Notebook: Google revenue edges past Windows'

It's official: Google is now bigger than Windows.

A statement like that always comes with qualifiers, and they're detailed below. But the basic fact is this: For the first time, Google Inc.'s revenue edged out Microsoft Corp.'s sales of Windows for PCs in quarterly results reported by the companies last week.

Although Google's big growth is common knowledge nowadays, the milestone wasn't widely noticed. If Microsoft and Google were aware of it, they didn't give any indication.

But symbolically, at least, the sudden financial parity between the dominant PC operating system and the leading Web search company underscores the rise of the Internet as a focal point of the modern computing world.

It also shows the growing financial clout of Google, founded less than a decade ago. And it explains why Microsoft, at more than 30 years of age, is trying to make itself a viable competitor in the online market that Google has largely defined.

To be precise, Microsoft's Client division, the part of the company that makes Windows for PCs, reported revenue of $3.808 billion in the quarter ended June 30. During the same period, Google posted revenue of $3.872 billion.

Here's where the qualifiers begin: Microsoft still makes a much bigger profit from its PC operating system than Google makes from its business.

Operating profit was $2.8 billion in Microsoft's Client division for the quarter, a 74 percent profit margin -- the type of profitability that has made Windows legendary in the business world. Google's operating profit was $1.1 billion in the same period, a more modest 29 percent margin.

And overall, Microsoft as a company still posts considerably higher revenue than Google does. Microsoft's executives last week trumpeted the fact that the company -- consisting of everything from the Office productivity suite to the Xbox 360 game console -- surpassed $50 billion in annual revenue for the first time in the fiscal year ended June 30.

Google's revenue over those four quarters was $14 billion.

At the same time, a direct comparison of the companies' financial results might not be entirely fair to either. That's because Microsoft and Google make most of their money in different ways. Microsoft still relies primarily on software licensing fees, while Google makes most of its revenue from advertisements next to search results and on third-party sites.

But at a highly conceptual level, search engines and operating systems serve similar roles -- essentially serving as starting points in the quest for information, files and computing capabilities.

Putting all that aside, more than anything else, the milestone illustrates the meteoric rise of Google's advertising-based business. Three years ago, in the quarter ended Sept. 30, 2004, the company's revenue of $805 million was less than a third of Microsoft's PC Windows revenue at the time.

Even last week, when Google's financial results fell short of Wall Street's profit expectations, its quarterly revenue was up 58 percent over the same quarter last year.

In Microsoft's PC Windows business, the rate of growth isn't nearly that high these days. In fact, one reason that Google as a company was able to surpass Microsoft's PC Windows revenue in the recent quarter was that the division came in at the low end of the company's projections, with about 14 percent growth.

Growth in the Windows division depends greatly on PC sales, because the operating system is mostly distributed with new computers.

Windows is "an immensely profitable business but it's basically tied to the PC run rate," said Matt Rosoff, an analyst at research firm Directions on Microsoft.

That's one reason Microsoft is trying to expand beyond its core Windows and Office businesses. And the area where the company is investing most heavily is online services, including Internet search and advertising.

Microsoft has recently seen some promising signs on that front, including a 33 percent increase in advertising revenue last quarter.

But even taking that into account, the latest quarterly revenue in Microsoft's Online Services Business, $688 million, was a fraction of Google's revenue.

Some important footnotes: Microsoft makes Windows for more than PCs. There are versions for mobile phones, computer servers and other machines. But the PC version is the most widely used and, for this comparison, most relevant.

Also, a quick glance at the companies' financial statements may make it seem that Google surpassed Microsoft's PC Windows business in revenue in the quarter ended Dec. 31.

However, for accounting reasons related to the Windows Vista launch, Microsoft deferred about $1.2 billion in revenue from the Windows sales that took place in that quarter, recognizing them as revenue in the subsequent period. After readjusting to get an accurate picture of when the sales took place, Windows was still bigger than Google at that point.

But if current trends continue, Google will be so far enough ahead of Windows that it won't take much crunching of numbers to see which is largest.

A simple comparison provides a sense of where things are headed: Microsoft is projecting revenue growth of 9 percent to 10 percent in the PC Windows division this fiscal year. And what was Google's revenue growth during the first six months of this year?

Sixty percent.