Google: Catching Up to Stay Ahead

When the Google Talk system was released last week, it set tongues wagging. Not that there was a great deal to say about the product, a free, feature-meager instant-messaging and voice-over-Internet chat system. But Google, without a clearly stated long-term strategy, sets off buzz and speculation with every move it makes--especially since it announced plans to sell more than 14 million shares in a new stock offering that could raise $4 billion.

Instant messaging is already well established, of course. Yahoo!, MSN and AOL (owned by TIME's parent company, Time Warner) have offered it for years. And Net telephony provider Skype has 51 million people using its system. So why would Google, with an $80 billion empire built entirely on search, bother playing catch-up on a product that seems unlikely to earn it much money? The same reason a hotel offers free wi-fi, says Scott Cleland, CEO of Precursor, an investment research firm. "They're not doing it to make money on wi-fi. It's to get people to come to the hotel." Google has launched a raft of products this past year, and its late entry into the software-features war suggests that it wants users committed to the brand, not just the search box.

As Microsoft and Yahoo! compete for the lucrative search market, Google is fighting back. "Many of the leaders of Google come from companies that have lost to Microsoft multiple times in the past--Sun, Novell, Netscape," says UBS Investment Research's Benjamin Schachter. "They're not going to sit back and just play defense." If offense is more their style, new plays are sure to unfold. --By Amanda Bower. With reporting by Laura A. Locke/San Francisco