An alliance between Dell and Google is no longer speculation, but was confirmed by CEO Schmidt at Goldman’s Internet Conference. CEO Schmidt acknowledged it is a multi-year deal and on a “worldwide basis”, but would not divulge any of the financial details. The strategic partnership is much deeper than I previously anticipated. Dell will pre-install Google’s toolbar, Desktop 4, and set the homepage of the PCs browser to a co-branded Google and Dell site. However, the most interesting part of the agreement is also a direct shot to the response of the DOJs recent ruling that Microsoft is allowed to set MSN as the default search engine for IE7. Since the DOJ said Microsoft was in the clear, Dell will be setting Google as the default search engine of choice for every Dell consumer, small, medium and large enterprise PC they sell amounting to tens of millions of computers a year. CEO Schmidt also confirmed the two companies have been in a trial period for approximately six months and stated “we understand the value that it provides and we really understand the economics well.” This is a big win strategically for Google in that it puts them directly on the PC out-of-the-box and will enable them to better position themselves against the upcoming release of Windows Vista and IE7. Given the six month trial period of the arrangement, Google must clearly like the amount of search queries and ROI they are witnessing on the initial sample and is betting on this being a large opportunity on a global scale. I am a believer that gaining presence on more PCs out-of-the-box will correlate to search query growth and thus incremental revenue for Google. That said, there are many unanswered questions surrounding the economics of the deal. Is Google really paying $1bn up-front for the agreement? Nobody seems to know for sure. Regardless, I can't help but believe given they were in a trial period for six months, Google would have continued with a formal alliance if the economics didn't make sense. Sure there are arguments out there that this could be a negative for Google's near-term cash flow depending on the amount of the upfront payment etc., but I can't believe a company with the minds at Google would move forward if they didn't like what they have seen thus far.
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