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Dell and Google confirmed on Tuesday they are testing a pre-installed package of Google software on Dell computers, in a potential blow to Microsoft’s dominance of the desktop software business.

Bob Kaufman, a spokesman for Dell, the world’s leading personal computer maker, said his company is evaluating Google software that PC customers could use to search both the public Web and for local information stored on their PCs.

“We can confirm that we are running a test with Google that could include a Google-powered Dell home page, Google desktop search and a Google Toolbar,” Kaufman told Reuters. “We are conducting a test of distribution of some of our software via Dell,” Google spokesman Jon Murchinson said.

Dell and Google spokesmen were responding to a report in the Wall Street Journal that described the inroads Google appears to be making with personal computer makers including Dell and No. 2 vendor Hewlett-Packard. An HP spokesman declined to comment.

The report, citing unnamed sources, said Dell and Google are in talks to put Google software on as many as 100 million new Dell PCs following a bidding process in which Google edged out Microsoft and after Yahoo Inc. withdrew. Google shares fell another 4.46 percent, or $17.18, to close at $367.92, adding to recent declines following the company’s disappointing quarterly report last week. Microsoft shares closed down 23 cents, or less than 1 percent at $26.94. Both trade on Nasdaq.

Microsoft spokesman Neil Charney declined to comment on specifics of the report, saying only that, “Our goal is to continue working closely with our (PC makers) to empower users with clear ways to find, organize and use information that matters to them.”

But Charles Di Bona, an analyst at brokerage Sanford C. Bernstein, downplayed the challenge, saying; “There is no serious evidence that the (Windows) franchise is actively being undermined in any material way at this point.” Analysts said the drop in Google’s stock reflected concerns that the Web search leader was prepared to dramatically increase the cost of acquiring new customers by agreeing to pay huge upfront fees to win deals with PC makers.

Google already has partnerships with PC makers such as Hewlett-Packard, Gateway, Sony, Apple Computer. and Toshiba. to distribute the Google Toolbar, Murchinson said.

DIVERSIFICATION INVOLVES TRADE-OFFS

A decade ago Microsoft used its leverage over PC makers to gain control over which software programs would be prepackaged with the new machines sold to consumers. Once installed, customers rarely bother to replace many of these programs.

By some estimates, for Google to win broad product placement for its search software on major PC makers could require it to jack up customer acquisition costs by hundreds of millions of dollars from nearly zero now, analysts said. “Where do you find almost 90 percent gross margins?” Hoefer & Arnett analyst Martin Pyykkonen asked, referring to Google’s current highly profitable business. “If it costs you more to acquire traffic, it could hurt margins,” he said.

Google’s global popularity means that it acquires most customers for free, by most analyst estimates. “I would rule out that Google would spend some major amount of money just for customer acquisitions,” said Google analyst Safa Rasht of brokerage Piper Jaffray. “It is hard to see why they would do it given their major and growing market share.”

To be sure, whatever upfront costs Google might pay PC makers would be a bet by the company that it would make the money back in years to come by locking in a vast audience. These Web searchers would make Google money every time they clicked on ads accompanying Google Web search results.

Neither Dell nor Google spokesmen would comment on details of the relationship beyond the pilot test of Google software, in particular on whether they were in talks on a broad deal. “We are always evaluating different technologies and various relationships on behalf of our customers,” Kaufman said. “We won’t go into any specifics,” Murchinson said. “We don’t have anything to announce at this point in time.”

(Additional reporting by Daisuke Wakabayashi in Seattle and Duncan Martell in San Francisco)


By: Eric Auchard


 

Copyright 2006 Reuters.

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