Dell to sell PCs installed with Google's software

Dell, the world's biggest maker of personal computers, will sell PCs installed with Google software, dealing a setback to Microsoft's longtime control of the desktop.

Under the three-year agreement, Dell will offer machines with Google programs for searching hard drives and e-mail as well as its Web browser tool bar, Google Chief Executive Officer Eric Schmidt said at a conference in Las Vegas that was sponsored by Goldman Sachs.

The accord is a victory for Google, the world's most-used search engine, putting its software before 100 million new PC owners over the life of the deal. Until now, Microsoft's Internet browser and services have been the default settings on Dell PCs and the agreement may derail Microsoft's attempts to draw users to its search services with its new Windows operating system.

"The gloves have come off," said Jordan Rohan, an analyst at RBC Capital Markets in New York. He rates Google "outperform" and said he doesn't own it. "This is a bare-knuckles distribution move for Google."

Google's software will be installed on Dell's PCs by the end of this month, Dell spokesman Jess Blackburn said. He declined to comment on financial terms of the deal.

The transaction came hours after Yahoo, the No. 2 search engine, and eBay, the largest online auctioneer, said they formed an alliance to combat Google's grip on the Internet.

Schmidt said he won't outline terms of the deals. The companies will share revenue, he said. "The real reason to do this is the end-user benefit," Schmidt said. Google's software is designed to make computers easier to use, he said.

Google will probably pay Dell a fee of about $5 to $10 for each PC, Rohan said. That would hand Dell a new revenue stream as it grapples with a slide in sales and profit growth. Dell Chief Executive Officer Kevin Rollins is struggling to reignite sales after Dell last week reported first-quarter earnings that missed a February forecast. Price cuts crimped profit and failed to spur orders as anticipated.

"For a long time, PC makers have wanted to sell real estate on their systems because it's prime real estate," said Roger Kay, an analyst with Endpoint Technologies Associates in Wayland, Massachusetts. "If they get a few bucks per copy, that could add up to a lot of money."

Hewlett-Packard declined to comment on whether the company is considering a deal with Google, according to spokesman Ryan Donovan. Hewlett-Packard is the world's No. 2 PC maker.

Google will be able to recoup the money quickly through revenue from search-linked ads, RBC's Rohan said. A payment by Google of $5 for each PC would be made back in about 12 clicks by users on a Google ad, Rohan said. Google gets between a few cents to tens of dollars each time a user clicks on its ads.

Dell sold 37.7 million PCs in calendar 2005, according to market researcher IDC. The company sold 9.64 million PCs in the calendar first quarter, down from 10.5 million in the fourth quarter, IDC said.

The deal curbs Microsoft's ability to close the gap with Google. Microsoft is putting search in the new Vista version of Windows, scheduled to hit stores in January, in an effort to encourage more customers to use it.

While Microsoft dominates desktop software, Google has four times more users for its Internet search and Google leads in advertising revenue. Microsoft CEO Steve Ballmer escalated spending on the company's MSN Internet unit to challenge Google and reclaim share of Internet search.

Microsoft handled just 11 percent of U.S. searches in March, compared with Google's 49 percent, Nielsen//NetRatings data show.

In the new Windows, Microsoft has placed search panes on the start menu, the Internet browser, as well as the program that helps users organize files and folders. The new version of Office also has search integrated into its programs.

Google's ability to buy a place on Dell desktops was made possible by a settlement between Microsoft and U.S. government regulators. Microsoft, in its settlement after the U.S. antitrust case, agreed to allow PC makers to promote and highlight rival software on their machines.

The company was found to have violated antitrust law by restricting computer makers from changing the way Windows was displayed when users turned on their machines in a bid to shut out rival Netscape Communications Corp.'s browser.

Google complained to the European Commission about Microsoft's new browser, which directs Web surfers to Microsoft's MSN and other search sites.

"The Dell deal and similar deals like it are the Vista vaccine," Rohan said. "They help to prevent against a loss of share between a tight integration between Vista and MSN search."