Thursday, February 11, 2010

A wave of buzzing: Has Google finally lost the plot?

The phrase "Google is the new Microsoft" has been bandied about by the tech media so much lately that it has become a cliché in its own right. With the latest addition to their stable of online services, Google Buzz, it seems to me to be increasingly true.

Now, before I explain why, I'd like to ask my readers a question: What is Google's primary business? If you're like 90% of the people out there, you immediately answered "Oooh, I know this one! It's the search engine!" You probably have a smug, satisfied look on your face too.

Of course, you'd be completely wrong.

Google is an advertising broker. Advertising revenue remains its biggest and only significant revenue stream. I'm not just talking about the ads that appear on their sites, I'm talking about AdWords and AdSense.

In case you haven't heard of these before (don't worry, most people haven't), Google AdSense is a service that allows website owners (and increasingly, mobile application providers, video distributors, and in fact anybody who offers any kind of content in which ads can appear) to let Google manage the ads that appear next to their content. Its sister service, AdWords, allows anyone who wants to advertise to get their ads on AdSense.

People pay to display their ads via AdWords and Google pays people to display those ads via AdSense. Minus the vig, of course. This is how Google makes money. About 57% of the ads on the Internet, at the latest count, are provided by AdSense.

That's Google's primary business. For all intents and purposes, it's Google's only business. Google, as a company, has one simple strategy to maximise revenue:

1. Get as many ads as possible bought through AdWords
2. Get as many ads as possible displayed through AdSense (including on its own sites)
3. Increase the perceived relevance of the ads displayed so that more people click on them.

Point 3 is important, and it's what Google is really good at. The more relevant the ads, the more likely people are to click on them. The more they click on them, the more advertisers pay for AdWords. The more people pay for AdWords, the more people get paid for AdSense, and so on. Yes, you may never click on 99.9% of the ads you see on the Internet, but if Google manages to get that down to 99.8% it just doubled its revenue, and since it also increased ad revenue for its AdSense partners, it's likely to get more of them, and hence more people advertising via AdWords, and hence even more revenue.

How does it do that, and why does it offer all these services like Google Search, GMail and YouTube for free? The answer to both questions is the same.

Because of these services, Google knows what you search for. It knows what's in your email. It knows what you chat about. It knows what you watch on YouTube. It definitely knows what ads you've clicked on in the past. It's got a veritable army of very, very smart and very, very well paid people working night and day to find ways to translate that information into increased click-through rates for ads, and another army of equally smart and well-paid people coming up with new services that it gives you for free in exchange for more information that it can use to target ads to you.

Most people positively freak out when they realise this, because they think there's this guy in an office in Mountain View, CA that goes to work every morning and pulls up people's personal information. "Ah, Joe Bloggs of Liverpool in the UK was searching for DIY plumbing instructions yesterday, and here he is emailing his father about a leaky tap. Perhaps this ad from Merseyside Plumbing would appeal to him."

Fortunately, there's nothing of the sort going on. There's so much information in Google's servers that getting an actual person to look at it would cost way, way, way more than any money they'd ever make from ads. It's also important to realise that this information isn't as clean and tidy as you imagine. Most of the time, it's not personally identifiable. They don't really care what you're called, except in the context that people named Joe are more likely to buy Brand X, if that's even the case. They don't really care that there's a record of you from the time you spent browsing from your mother's PC mixed up with her data and missing from yours; Google plays the numbers game, trying to get that 99.8% to 99.79%. The data is noisy, it's disjointed, it's incomplete, and most importantly there's so much of it that the only way to process it is to use the type of large, distributed computer systems that Google is so good at designing. There's no clear cause and effect here, and no direct human intervention.

People who search for term A aren't necessarily going to click on an ad for product B, but as long as they're slightly more likely to, it's good enough for Google to feed into their algorithms. The type of information you really consider private and personal - your name, your address, your bank account number - is actually a lot less valuable to Google than how many times you mentioned the word "iPhone" in your emails, blog posts and tweets in the past six months.

So, Google is an advertising broker, and everything else it does - purportedly out of the goodness and generosity of its own heart - serves to increase its ad revenue. With this established, let's go back to the whole "Google is the new Microsoft" thing.

If you know anything about the IT world, you can immediately see the similarity. Windows and Office are to Microsoft what AdWords and AdSense are to Google. Just like Google loses money on YouTube so it can make more on AdWords, Microsoft loses money on Internet Explorer or SQL Server so it can make more on Windows.

They're not the only ones either. Every major IT behemoth has a similar business model: Build a solid revenue stream out of a monopoly and then spend gazillions on R&D to give away free stuff that loses you money but makes people more likely to spend even more money on your main business. With Google it's ads. With Microsoft it's operating systems and office suites. With Apple it's shiny gadgets - from iPods to Mac Pros. With IBM it used to be (and to a certain extent still is) mainframes.

The problem with this approach is that it makes these companies rather single-minded. Everything that might affect their primary business model is a threat that must be eliminated. Like Microsoft before it, Google has been on an acquisition rampage for years. Any company that comes up with something that competes with any part of Google's advertising business - or any service that drives the data collection that makes the ad business profitable - is either bought up, has its top employees poached, or, if all else fails, finds itself competing with a free service from Google that benefits from an R&D budget ten times its turnover. Look out - you just got Netscaped.

Mind you, when I say that's a problem, I don't mean it's a problem for Google, just like Microsoft's utter dominance of the IT industry in the 90s wasn't a problem for them either. But like Microsoft, if you build this huge organisation with an excess of cash hell-bent on maintaining your primary revenue stream by launching loss leaders in any field that's even remotely related to it, cracks will start to appear. There's a certain amount of organisational schizophrenia kicking in because the people making all the cool stuff you lose money on either don't realise they're only doing it to secure your main revenue stream or would rather not think about it - and in the end, most of them would rather work for a company that wants their project to be a commercial success, not just a way to put competitors out of business.

Add in the fact that you'll often pour large amounts of time and money into initiatives that you think will drive more money to your revenue stream, or prevent money from flowing away from it, but actually do nothing of the sort, and you get into the kind of mess Microsoft has been in for the last decade or so. Massively delayed projects (Vista, anyone?) entire loss-making divisions of questionable value (XBox, anyone?), product initiatives that turn into complete failures (Zune, anyone?) and a high staff turnover mean that sooner or later, you start bleeding serious amounts of cash. Yes, Microsoft is still profitable and dominant, but nowhere near where it used to be. Take a look at MSFT's stock price for the last ten years and you'll see that overall, it's been pretty flat.

It happened to IBM in the nineties, it happened to Microsoft in the naughties, is it Google's turn in whatever we're calling the coming decade? There are signs. Google has branched out to just about everything. Smartphones. Operating systems. A full-blown DNS service. And now this Google Buzz thing. On its surface, it makes sense: Google wants the data that now sits on Facebook and Twitter's servers to drive its ad matching algorithms. And yet, just a few months ago it was all about Google Wave, which seemed to be more or less the same thing. Who made Buzz? Did they talk to the Wave people? How come Buzz integrates with email, Facebook and Twitter while we're still waiting for proper Wave extensions that do the same?

As for Chrome OS, I've already covered it in a previous post. The whole Andriod / Nexus One thing? Partner up with Motorola and their ilk to compete with the iPhone, and then release your own (sort of - the hardware is built and designed by HTC) competing phone that keeps the more advanced features for itself?

For most people, the fear is that Google is going to turn evil and abuse the vast amounts of data they have on everyone. I find that scenario highly unlikely. What I'm increasingly worried about is how Google has lost its focus and is beginning to thrash around the IT industry with questionable initiatives - albeit ones that are backed by billions of dollars of cash and aimed squarely at anyone who threatens their dominance of the online advertising business.

Just like Microsoft. And just like Microsoft killed innovation in the 90s and fought the tide of the Internet revolution, I'm afraid Google is doing the same, and fighting the revolution that's about to happen in the coming decade: That of people paying real money for content and services online. Just like Microsoft knew that if everyone did all their computing in a browser they wouldn't need to buy Windows any more, Google knows that if people can sell their content and services online they won't need to buy ads from them any more. Both were right, but both were also wrong. People still need Windows. People will still need ads. But when corporate schizophrenia is coupled with corporate paranoia, bad things happen - and the prognosis for Google is not at all good.

1 comment:

  1. Ok, I see what you're saying and I have to agree.
    Seeing Google go down the same path as Microsoft is a shame, and I hope they pull back, because unlike Microsoft, I actually have genuine love for the free money-losing stuff they give us.
    I think we should get together and come up with a competing web site/company that threatens their dominance just so we can get bought out :)