 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Earlier this week, the U.S. Department of Justice, along with attorneys general from 11 states filed a long-expected antitrust lawsuit accusing Google of being a monopoly gatekeeper for the internet. The suit draws on section two of the Sherman Antitrust Act, which makes it illegal to monopolize trade or commerce. Of course, Google's going to fight the lawsuit, but in our view, the company has to make bigger moves to diversify its business, and the answer we think lies in the cloud and at the edge. Hello everyone, this is Dave Vellante, and welcome to this week's Wikibon Cube Insights, powered by ETR. In this Breaking Analysis, we want to do two things. First, we're going to review a little bit of history, according to Dave Vellante, of the monopolistic power in the computer industry. And then next, we're going to look into the latest ETR data. We're going to make the case that Google's response to the DOJ suit should be to double or triple its focus on cloud and edge computing, which we think is a multi-trillion dollar opportunity. So let's start by looking at the history of monopolies in technology. We start with IBM. In 1969, the U.S. government filed an antitrust lawsuit against Big Blue. At the height of its power, IBM generated about 50% of the revenue and two-thirds of the profits for the entire computer industry. Think about that. IBM's monopoly on a relative basis far exceeded that of the virtual wind-tell monopoly that defined the 1990s. IBM had 90% of the mainframe market and controlled the protocols to a highly vertically integrated mainframe stack, comprising semiconductors, operating systems, tools, and compatible peripherals like terminals, storage, and printers. Now the government's lawsuit dragged on for 13 years before it was withdrawn in 1982. IBM at one point had 200 lawyers on the case. It really took a toll on IBM to placate the government during this time. And somewhat after, IBM made concessions such as allowing mainframe plug-compatible competitors to access its code and limiting the bundling of application software in fear of more government pressure. Now the biggest mistake IBM made when it came out of antitrust was holding on to its mainframe past. And we saw this in the way it tried to recover from the mistake of handing its monopoly over to Microsoft and Intel, the virtual monopoly. What it did was, you may not remember this, but it had OS2 and Windows and it said to Microsoft, we'll keep OS2. You take Windows. And the mistake IBM was making was thinking that the PC could be vertically integrated like the mainframe. Now let's fast forward to Microsoft. Microsoft's monopoly power was earned in the 1980s and carried into the 1990s. In 1998, the DOJ filed a lawsuit against Microsoft alleging that the company was illegally thwarting competition, which I argued at the time was the case. Now, ironically, this is the same year that Google was started in the garage. And I'll come back to that in a minute. Now in the early days of the PC, Microsoft, they were not a dominant player in desktop software. You had Lotus123, WordPerfect. You had this company called Harvard Presentation Graphics. These were discrete products that competed very effectively in the market. Now in 1987, Microsoft paid $14 million for PowerPoint. And then in 1990 launched Office, which bundled spreadsheets, word processing and presentations into a single suite. And it was priced far more attractively than the sum of the alternative point products. Now in 1995, Microsoft launched Internet Explorer and began bundling its browser into Windows for free. Windows had a 90% market share. Netscape was the browser leader in a high-flying tech company at the time and the company's management pooh-poohed Microsoft's bundling of IE, saying they really weren't concerned because they were moving up the stack into business software. Now they later changed that position after realizing the damage that Microsoft bundling would do to its business, but it was too late. So in similar moves of ineptness, Lotus refused to support Windows at its launch. And instead it wrote software to support the deck Vax, a mini-computer that you probably have never even heard of. Novell was a leader in networking software at the time. Anyone remember NetWare? So they responded to Microsoft's move to bundle network services into its operating systems by going on a disastrous buying spree. They acquired WordPerfect, Quattro Pro, which was a spreadsheet in a Unix OS to try to compete with Microsoft, but Microsoft had the volume and killed them. Now the difference between Microsoft and IBM is that Microsoft didn't build PC hardware, rather it partnered with Intel to create a virtual monopoly. Now the similarities between IBM and Microsoft however, were that it fought the DOJ hard, okay, of course, but it made similar mistakes to IBM by hugging on to its PC software legacy until the company finally pivoted to the cloud under the leadership of Satya Nadella. Now that brings us to Google. Google has a 90% share of the internet search market. There's that magic number again. Now IBM couldn't argue that consumers weren't hurt by its tactics, because they were. IBM was gouging mainframe customers because it could on pricing. Microsoft on the other hand could argue that consumers were actually benefiting from lower prices. Google's attorneys are doing what often happens in these cases. First, they're arguing that the government's case is deeply flawed. Second, they're saying the government's actions will cause higher prices because they'll have to raise prices on mobile software and hardware. Sounds like a little bit of a threat. And of course, it's making the case that many of its services are free. Now what's different from Microsoft is Microsoft was bundling IE. That was a product which was largely considered to be crap when it first came out, it was inferior. But because of the convenience, most users didn't bother switching. Google on the other hand has a far superior search engine and earned its rightful place at the top by having a far better product than Yahoo or Excite or InfoSeq or even AltaVista. They all wanted to build portals versus having a clean user experience with some non-intrusive ads on the side. Hmm, boy, has that part changed, regardless. What's similar in this case, as is in the case with Microsoft, is the DOJ is arguing that Google and Apple are teaming up with each other to dominate the market and create a monopoly. Estimates are that Google pays Apple between eight and $11 billion annually to have its search engine embedded like a tick into Safari and Siri. That's about one third of Google's profits going to Apple. And it's obviously worth it because according to the government's lawsuit, Apple originated search accounts for 50% of Google's search volume, that's incredible. Now, does the government have a case here? I don't know, I'm not qualified to give a firm opinion on this and I haven't done enough research yet but I will say this, even in the case of IBM where the DOJ eventually dropped the lawsuit, if the US government wants to get you, they usually take more than a pound of flesh. But the DOJ did not suggest any remedies and the Sherman Act is open to wide interpretation so we'll see. What I am suggesting is that Google should not hang too tightly onto its search and advertising past. Yes, Google gives us amazing free services but it has every incentive to appropriate our data and there are innovators out there right now trying to develop answers to that problem where the use of blockchain and other technologies can give power back to us, the users. So if I'm arguing that Google shouldn't, like the other great tech monopolies, hang its hat too tightly on the past, what should Google do? Well, the answer is obvious, isn't it? It's cloud and edge computing. Now let me first say that Google understandably promotes G Suite quite heavily as part of its cloud computing story, I get that. But it's time to move on and aggressively push into the areas that matter in cloud, core infrastructure, database, machine intelligence, containers, and of course the edge. Not to say that Google isn't doing this but there are areas of greatest growth potential that they should focus on and the ETR data shows it. But let me start with one of our favorite graphics which shows the breakdown of survey respondents used to derive NetScore. NetScore, remember, is ETR's quarterly measurement of spending velocity. And here we show the breakdown for Google Cloud. The lime green is new adoptions, the forest green is the percentage of customers increasing spending more than 5%. The gray is flat and the pinkish is decreased by 6% or more. And the bright red is we're replacing or swapping out the platform. You subtract the reds from the greens and you get a NetScore of 43%. Which is not off the charts but it's pretty good and compares quite favorably to most companies. But not so favorably with AWS which is at 51% and Microsoft which is at 49%. Both AWS and Microsoft's red scores are in the single digits whereas Google's is at 10%. Look, all three are down since January thanks to COVID but AWS and Microsoft are much larger than Google and we'd like to see stronger across the board scores from Google. But there's good news in the numbers for Google. Take a look at this chart. It's a breakdown of Google's NetScore's over three survey snapshots. Now we skip January in this view and we do that to provide a year of a year context for October. But look at the all important database category. We've been watching this very closely particularly with the snowflake momentum because BigQuery generally is considered the other true cloud native database. And we have a lot of respect for what Google is doing in this area. Look at the areas of strength highlighted in the green. You got machine intelligence where Google is a leader in AI. You've got containers. You know, Kubernetes was an open source gift to the industry and a linchpin Google's cloud and multi-cloud strategy. Google cloud is strong overall. We were surprised to see some deceleration in Google cloud functions at 51% NetScore's to be honest with you because if you look at AWS Lambda and Microsoft Azure functions they're showing NetScore's in the mid to high 60s but man it's still elevated for Google. Now I'm not that worried about steep declines in Apogee and Looker because after an acquisition things kind of get spread out around the ETR taxonomy. So don't be too concerned about that. But as I said earlier, G Suite meh just not that compelling relative to the opportunity in other areas. Now I won't show the data but Google cloud is showing good momentum across almost all industries and sectors with the exception of consulting and small business which is understandable but notable deceleration in healthcare which is a bit of a concern. Now I want to share some customer anecdotes about Google. These comments come from an ETR Venn round table. The first comment comes from an architect who says that it's an advantage that Google is not entrenched in the enterprise. I'm not sure I agree with that but anyway, I do take stock in what this person is saying about Microsoft trying to lure people away from AWS. And this person is right that Google essentially is exposed its internal cloud to the world and has a ways to go which is why I don't agree with the first statement. I think Google still has to figure out the enterprise. Now the second comment here underscores a point that we made earlier about BigQuery. Customers really like the out of the box machine learning capabilities. It's quite compelling. Okay, let's look at some of the data that we shared previously. We'll update this chart once the company's all report earnings but here's our most recent take on the big three cloud vendors market performance. The key point here is that our data and the ETR data reflects Google's commentary in its earning statements and that GCP is growing much faster than its overall cloud business which includes things that are not apples to apples with AWS, the same thing is true with Azure. Remember AWS is the only company that provides clear data on its cloud business whereas the others will make comments but not share the data explicitly. So these are estimates based on those comments and we also use as I say the ETR survey data in our own intelligence. Now, as one of the practitioners said Google has a long ways to go. It's about an eighth of the size of AWS and about a fifth of the size of Azure. And although it's growing faster, at this size we feel that its growth should be even higher but COVID is clearly a factor here so we have to take that into consideration. Now, I want to close up by coming back to antitrust. Google spends a lot on R&D. These are quick estimates but let me give you some context. Google shells out about $26 billion annually on research and development. That's about 16% of revenue. Apple spends less, about 16 billion which is about 6% of revenue. Amazon 23 billion or about 8% of the top line. Microsoft 19 billion or 13% of revenue and Facebook 14 billion or 20% of revenue. Wow. So Google for sure spends on innovation and I'm not even including CAPEX in any of these numbers. And the hyperscale guys as you know spend tons on CAPEX building data centers. So I'm not saying Google's cheaping out. They're not. And they got plenty of cash in their balance sheet. They got around 120 billion. So I can't criticize their roughly $9 billion in stock buybacks the way I often point fingers at what I consider IBM's overly wall street friendly use of cash. But I will say this. It was Jeff Hammabocker who I spoke with on theCUBE in the early part of last decade at Duke World who said, the best minds of my generation are spending their time trying to figure out how to get people to click on ads. And frankly, that's where much of Google's R&D budget goes. And again, I'm not saying Google doesn't spend on cloud computing, it does. But I'm going to make a prediction. The post cookie apocalypse is coming soon. It may be here. iOS 14 makes you opt in to find out everything about you. This is why it's such a threat to Google. The days when Google was able to be the keeper of all of our data, to house it and to do whatever it likes with that data, that ended with GDPR. And that was just the beginning of the end. This decade is going to see massive changes in public policy that will directly affect Google and other consumer facing technology companies. So my premise is that Google needs to step up its game in enterprise cloud and the edge much more than it's doing today. And I like what Thomas Curian is doing. But Google is undervalued relative to some of the other big tech names. And I think it should tell Wall Street that our future is in enterprise cloud and edge computing. And we're going to take a hit to our profitability and go big in those areas. And I would suggest a few things. First, ramp up R&D spending and acquisitions even more. Go on a mission to create cloud native fabric across all on-prem, in the edge, multicloud. Yes, I know this is your strategy but step it up even more. Forget satisfying investors. You're getting dinged in the market anyway. So now's the time to move on Wall Street and attack the opportunity unless you don't see it but it's staring you right in the face. Second, get way more cozy with the enterprise players that are scared to death of the cloud generally and they're afraid of AWS in particular. Spend the cash and go way, way deeper with the big tech players who have built the past. IBM, Dell, HPE, Cisco, Oracle, SAP and all the others. Those companies that have the go to market shops to help you win the day in enterprise cloud. Now I know you partner with these companies already but partner deeper, identify game-changing innovations that you can co-create with these companies and fund it with your cash hoard. I'm essentially saying do what you do with Apple and instead of sucking up all our data and getting us to click on ads, solve really deep problems in the enterprise and the edge. It's all about actually building an on-prem to cloud, across cloud to the edge fabric and really making that a unified experience and there's a data angle too, which I'll talk about now. The data collection methods that you've used on consumers is incredibly powerful if applied responsibly and correctly for IoT and edge computing. And I mean to trivialize the complexity at the edge. There really isn't one edge. It's telcos and factories and banks and cars I know you're in all these places, Google, because of Android but there's a new wave of data coming from machines and cars and it's going to dwarf people's clicks. And believe me, Tesla wants to own its own data and Google needs to put forth a strategy that's a win-win. And so far you haven't done that because your head is in advertising. Get your heads out of your ads and cut partners in on the deal. Next, double down on your open source commitment. Kubernetes showed the power that you have in the industry. Ecosystems are going to be the linchpin of innovation over the next decade and transcend products and platforms. Use your money, your technology and your position in the marketplace to create the next generation of technology leveraging the power of the ecosystem. Now I know Google's going to say, we agree. This is exactly what we're doing, but I'm skeptical. And I think you see the cloud as a tiny little piece of your business. You have to do what Satya and Nutella did and completely pivot to the new opportunity. Make cloud and the edge your mission. Bite the bullet with Wall Street and go dominate a multi-trillion dollar industry. Okay, well, there you have it. Remember, all these episodes are available as podcasts, so please subscribe wherever you listen. I publish weekly on wikibon.com and siliconangle.com and I post on LinkedIn each week as well, so please comment or DM me at D-Valante or you can email me at david.valante at siliconangle.com. And don't forget to check out ETR.plus. That's where all the survey action is. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching, everybody. Be well and we'll see you next time.