Welcome to the Google decade

I was originally intending to post this at the beginning of the year but I’m glad I waited, or rather procrastinated – there have been some noteworthy developments on the topic. I purposefully left out the multitude of outside references in this article – as it would stretch this lengthy post into a book. If you are interested in digging deeper on any of the topics, I welcome your emails and comments below. For the insiders, I would expect, the points made are not mind-blowing but I think you will find the connected dots interesting. For everyone else, it is important to know where your personal data and the industry as a whole are going. So without further ado, below is my thesis…

For the last five years I’ve been keeping a mental tally of Google acquisitions and entries into other markets. There was an article I read sometime in early 2005 about “what is Google going to do with its big pile of cash?”. In it, there was a suggestion that Google should go on a shopping spree, and so it did: 11 acquisitions in 2005, 10 in 2006, 16 in 2007, two in 2008, six in 2009 (plus the launch of Google Ventures which invested in five companies that year), and four so far in 2010. That on its own is not particularly interesting – after all public companies need to show consistent growth quarter-to-quarter and M&A is a textbook method to doing so. There are of course subtle nuances in this case, as Google’s core product was/is still a revenue rocket and they were buying mostly pre-revenue companies.

The interesting part comes in the fact that Google’s strategy is to apply their asymmetric (where the advertiser pays for the customer’s experience) revenue model to 95%+ of their products. This is of course innovative and in many cases (YouTube) only profitable at their massive volume of eyeballs. However this practice has began to cross the monopoly line and is certainly antagonistic to Google’s “do no evil” quasi-slogan. One more obvious place was the Google Maps (free) GPS vs. all the one-product GPS companies. More on that a little later.

For those that were “in the industry” in the 90’s, all of this should sound familiar. The way Microsoft fairly/unfairly dominated the desktop market in that decade, Google has positioned itself in an almost insurmountable fashion to dominate your online “desktop”. As the transmissional bandwidth (your Internet connection speed) catches up to computational bandwidth (the speed of your computer); it is a well understood reality that you will be doing increasingly more, and eventually all, of your computing in the browser. Even Microsoft is now struggling to catch up by releasing “cloud” versions of Office Live and other less important (to their revenue) products.

What is really interesting to me is just how much Microsoft’s 90’s and Google’s current play-books overlap. Google is systematically reapplying market block strategies of the past and rather quickly converting major software categories to ad-based. One could argue that this is quite scary to watch; because so much of how the world works today and even more so in the future, is rooted in the information economy. Star developers are already calling Google “The Man”, much like they did IBM in the 80’s and Microsoft in the 90’s.

So let’s take a deeper look at some specific examples:

Windows vs. Chrome Browser to Chrome OS
The most obvious and probably most important long-term online strategy for Google is the Chrome product line. With Internet-based media consumption already a dominant consumer activity and the migration of commercial data storage/management to the cloud accelerating; the browser has become the single most important software application. So appropriately, Google has gotten into the game by introducing the Chrome browser to control the experience and more importantly the “search” function. In their typical fashion, Google introduced a great product that is superior in usability. As far as users are concerned usability IS the product and this explains its quick rise in popularity. Chrome is only second in adoption rate to Firefox which was the original Explorer alternative and more of a reflection on just how bad it was/is.

The next step is the Chrome OS. This is Google’s response to the rapid growth of netbooks – which underscores my earlier point about consumers’ activity now being primarily in the browser. It seems logical to simply bypass the OS and go straight to the browser. Versus the needless complexity of maintaining a legacy OS with a browser stacked on top. To this point it is has been an easy way out because consumers are used to Windows and accept changes incrementally. Plenty of radical solutions failed to get adoption in the marketplace because consumers were not able to make the switch overnight. Now that the public has been gradually warmed up to the idea, Microsoft has to play defense to keep selling OS licenses and stay in the game. Meanwhile Google gives away the OS open source and monetizes the web traffic. Coincidentally, this is the raison d’être of the iPad. If the trend continues on this trajectory (and there are only indications that it will execrate), in 5 years, Chrome OS driven by it’s ad model should own ~80% of the consumer market while iPad-like devices will control the non-web application supply chain and own the premium 10-20%.

Windows Mobile vs. Palm vs. RIM vs. iPhone vs. Android (+ Google Voice)
After a decade of halfhearted efforts by Microsoft, Palm and RIM; Apple came in and made mobile important. Not from the standpoint of making phone calls, but as an indispensable computing platform with a clear place in people’s lives today. Google recognized the significance of this early and (rumor has it) has been paying Apple ~$100M per year to be the default search function in iPhone’s browser. Lately rumors have been that Apple maybe letting Microsoft take over the search function as it has become apparent that Google is a bigger threat to Apple’s iPhone than anything else.

Last year, with much fanfare, Eric Schmidt removed himself from Apple’s board. This was quickly followed up with the introduction of the Android mobile platform which seeks to displace Microsoft as the operating system of choice for hardware providers without their own mobile OS. The allure here is strong: solid platform, developer community, and it’s open source (free). How would any hardware manufacturer chose to pay the Windows Mobile license instead?

It is a different strategy than Apple’s typical unified software/hardware approach but has an even bigger place in the market as it will be disseminated by numerous hardware partners into all markets. There is of course the strange anomaly of the Nexus One handset Google introduced. In my opinion, it is an egotistical move to raise the standards for their hardware partners. Perhaps brilliant and something Microsoft should have tried all those years they blamed their short falls on their hardware partners.

The addition of Google Voice (by way of acquisition of Grand Central) to the mix changes the game. In this case Google is trying to control the “last-mile” of your phone experience (voice and SMS), disrupting the typical use cases in both mobile and landlines. Again, whoever controls the user experience, in the customer’s eyes IS the product. It is yet to be seen how this will play out but Apple has considered Google Voice a big enough threat to famously block it on the iPhone.

Some things are certain. Microsoft forfeited its leadership position in the smart phone market as Steve Balmer dismissed the iPhone in 2007 as an “expensive toy”. They then took three years to announce their catch-up strategy which will only be available at the end of 2010 and has already pissed off many of their loyal users (and not to mention decimated their sales for the rest of the year) because it won’t be compatible with existing devices. After a decade of selling the same exact OS, Palm made a valiant comeback effort but failed to get their partners, customers and would-be developers excited. Too little, too late and I’m afraid recent developments (missed earnings expectations, etc) demonstrate that they may be out of time. RIM has been iterating pretty regularly with its onslaught of handsets and improvements to the OS. They act like they are safe with the core business demographic – all while Apple has removed all the perceived obstacles (enterprise email, security, etc) towards that market and has been eating into it consistently every quarter. So while Apple did the heavy lifting and cleared the field, Google timed Android quite ideally. Pretty soon it will be down to them with RIM as a possible (distant) third.

Also, yet to be determined, the effects of Apple’s patent infringement lawsuit against HTC. HTC is the biggest Android hardware partner and the move is largely seen as a proxy fight with Google. Get your bag of popcorn.

Microsoft Exchange vs. Google Apps
After famously missing the internet wave in the mid-90’s, Microsoft put its online strategy into turbo with the Explorer vs. Netscape war. They won that war and Explorer then languished for years as stagnant monolith without competition and a need to innovate – but that’s a different story for a different post. What is not as much talked about but has proven to be a major cash cow, is Microsoft’s industry-standard combination of Outlook email client and Exchange enterprise email server. In fact it is so important that it consistently serves as one of the last dams to keep business users from pouring out and converting to Mac. Many business users are still hooked on Outlook but the real reason the product has been so ingrained is the average technology complacency of a corporate IT team. To say that this is a linchpin product for Microsoft would be an understatement.

Google’s Gmail started out as a Yahoo and Hotmail competitor which set out to do free email in a different and better way. The most obvious difference was of course the way emails and replies were organized into much more logical groups or “conversation”. The other incremental differences added up to a superior product: better spam protection, faster response time, simpler user interface, more natural user flow, considerably more (free) storage, more open architecture that played better with other products, etc. Very quickly Gmail stood up to be noticed and is to this day growing much faster than any other service in the space. This of course means they will likely one day take over the leadership position in this category as well.

As enterprises became more comfortable with the notion of storing their data in the cloud, Gmail was released as part of the Google Apps product line and offered as a great way to have hosted company email. The basic service (ad supported with enough space for 95% of typical email users) is absolutely free and takes minutes to setup. The premium service is just $50 per user per year. As an alternative to the cost and headache of setting up and maintaining a Microsoft Exchange server on your network – there is simply no competition. Some of the biggest customers are Genentech (~17,000 users) and City of Los Angeles (~53,000 users). If it is good enough for them, it is most certainly good enough for the countless five person shops.

Microsoft is now again playing catchup by improving Outlook online (which foolishly tries to emulate a desktop application user interface). I’m sure they must be sweating bullets knowing what will happen if/when Outlook looses all of its magic power over business users. Yet another example of how Google is decimating a previously insurmountable competitor by applying its asymmetric revenue model (in the case of the free version). So far only Google has been able to finely optimize the model and combine it with massive scale to make a massive profit. Others can’t even come close.

Microsoft Office (+ Adobe Creative Suite) vs. Google Docs (+Picasa, +Picnik)
It is no secret that Office is Microsoft’s cash cow. Before the internet, word processing and spreadsheets were the killer apps – applications that hands-down beat the alternative (typewriters, calculators, etc). They inspired business, as well as the long tail of consumers, to fulfill Bill Gates’ dream of a computer in every home and on every desk. Desktop publishing is really an extension on the same idea. Adobe having originally built a business on Postscript (a revolutionary leap in computer-to-printer communications), made its real money on desktop publishing and the democratization of design tools.

The importance of these two product lines cannot be ignored and will remain key well into the future. One could argue that all media creation tools come from these roots and the harvest is today’s obsessively media producing/consuming society.

This is why Google Docs is the dark sheep of Google’s App strategy. The superior email functionality is doing a great job of drawing business users in to a free Google Docs account. It is a great passive way to introduce the concept of Office in the browser and file storage in the cloud. As users become more comfortable with the model, they will already be ingrained with Google Docs.

Google’s acquisition of Picasa in July of 2004 is largely misperceived as an answer to Flickr. Misperceived because Yahoo only acquired Flickr eight months LATER. It is a natural next step to move on to image creation and other more complex media. Google’s recent acquisition of Picnik, an online image editing tool, underscores this strategic direction. So while Yahoo bought Flickr for the mass amount of user generated content, Google is working on enhancing its media creation tool strategy.

Google’s ultimate goal is to get users used to the idea of creating increasingly complex media in the browser and to remove the need for local storage of data. Not only will this allow them to monetize each user more but it will let Chrome OS completely displace Windows!

MSDN vs. Google App Engine
Another key to Microsoft’s success and dominance in the 90s and early 2000s was the Microsoft Developer Network. A program that fostered and supported developers and IT professionals using Microsoft technologies. A place to get free or cheap software and marketing resources. A place to become a certified IT profession in Microsoft’s unnecessarily complex technologies and their maintenance. From the perspective of developers MSDN was the grand daddy of the Apple App Store.

Enter the Google App Engine. A place to build and host your web applications for free. Which, as of this week, now allows you to sell your applications to Google’s 20+ million Apps users.

On the surface this is certainly notable. Behind the scenes it is even more interesting. The current generation of developers is far more interested in building web and mobile applications than desktop applications. Microsoft has lost the war for web servers to an array of open source Linux based operating systems. In result, Microsoft’s web application technologies like .NET are fading and their database products can’t compete with neither the open source or high-end commercial products in the space. Microsoft has simply lost its appeal to the current generation of web developers. Google Apps, on the other hand, launched with support for their technology of choice Python later adding Java – both are agnostic platforms that have wide spread adoption. They will no doubt add support for Ruby and whatever else comes along in the future.

Everyone copied Apple’s mobile app marketplace strategy and Android is the only one that came within an order of magnitude. RIM and Palm have largely failed to get developer support while Microsoft Mobile is starting over. Google’s is applying this strategy and attempting to control the developer community for web applications with a similar intensity. Free hosting and access to 20+ million users is a pretty good carrot to start.

PayPal vs. Google Checkout vs. Facebook Payments (coming soon)
Online payments is an area Microsoft hasn’t really gotten involved in. Maybe they feared the backlash associated with consumers feeling like they are literally giving their money to them. On the other hand, PayPal didn’t enter the market to compete with traditional merchant processing. They originally envisioned a novel way to share costs with your friends, hence the name Pay Pal. Square, with Twitter’s inventor Jack Dorsey at the helm, are essentially chasing the same problem – a less painful credit card payment process designed for the long tail of transactions in exchange for a higher fee than with a traditional merchant account. PayPal stumbled onto a bigger problem and ultimately built a business on small online merchants who needed to accept payments faster and easier.

PayPal’s popularity with eBay sellers directly lead to them being acquired by eBay in 2002. No doubt their original plan was to go public, but in the tech nuclear winter post-2000 eBay’s $1.5B offer was too much to pass up. Under eBay’s management PayPal has pretty much stayed still. It served its purpose to solve the transaction problem for eBay but didn’t grow a whole lot outside of those walls.

Meanwhile, Google realized that most of their ad revenue is transactional. Merely a first step in driving buyers through a buying cycle, which concluded with a purchase. This is Google’s single most lucrative product. So why not make it even more profitable?

Google acquired Urchin in 2005. What before was an inexpensive and popular analytics package was relaunched as Google Analytics and became free. Users rejoiced, but online marketing insiders were shellshocked. Google was then able to collect detailed traffic information on entire categories of websites, including online stores. Where before Google advertising worked like an auction, and given good conversion (from visitor to customer), a knowledgeable marketeer could do really well on their margins (cost of acquiring the customer vs. profit margin on the sale). Now, Google knew intimate details of how that traffic was interacting with the target site and could make a more accurate guess on how much that traffic is worth. All of a sudden those minimum bids were on the rise, and in some categories like mortgage leads, they became astronomical.

Almost exactly a year after buying Urchin, Google Checkout launched. An alternative payment gateway to traditional merchant accounts and PayPal. Users were lured with a more seamless experience and merchants with lower fees and better presence in search results. Now, Google knew exactly how that traffic converts and what it is worth to those merchants. The circle was complete.

Google Checkout never took off like a rocket, but it has enough of a cross-section sample to be able to measure what the advertising is really worth to many product categories. Without a doubt, it is an important tool in maximizing Google’s profit on its core advertising product.

Enter Facebook payments. So far, this has been somewhat under the radar but it is a potential threat to Google’s core. Facebook’s 400 million users now spend more time there than elsewhere online. Those users’ general activities are now more-and-more originating from Facebook. In a sense, it is becoming a layer of abstraction on the internet and recreating a structured experience reminiscent of Prodigy and AOL days. Facebook knows infinitely more about each user from their (volunteered) detailed profiles and content. Google is mostly guessing based on behavior. The Facebook payments system will become important as users get more comfortable with commerce on the site – at which point the advertising will be much more accurate as the ad targeting can be far more narrow and specific.

For now Google is safe, as most of it’s ad revenue is driven by users who are seeking out products and services to buy. Very valuable traffic. On the flip side, Facebook’s traffic is only now being groomed to think of ecommerce as part of the experience. Google will need to get more social as these trends shift in the next couple of years (or less). Hence Google Buzz (social media aggregation) and Google Wave (online collaboration and email evolution experimentation).

Facebook vs. Twitter vs. Google Buzz
As Gary Vaynerchuck puts it: advertising goes where the eyeballs go. For the better part of the last decade, social media has taken over more and more of the online conversation. During the first wave companies scrambled to build portals and invested heavily in producing content to keep users interested. Web version 2.0 has been defined by companies providing a platform for users to generate their own content and share it with the world. The growth of information and interaction quickly became exponential. Although one could argue that the average quality of content turned into drek, the model did allow for tools to mature and the volume of information to explode.

All this has doubled the average American’s time online to 13 hours a week in just 10 years. Teenagers now spend 31 hours a week online. And the information class spends well over 40 hours because the Internet is an intimate part of their personal and professional lives. In contrast, an average American watches about 37 hours of TV a week. The gap is quickly closing and the lure of interactivity is the culprit. This doesn’t even take into account the explosive growth of Internet use (and broadband penetration that puts US to shame) internationally. As of 2009, there are officially more people online in China then there are breathing and breeding in the US.

What everyone is doing online is creating and consuming content in an infinitely trackable and monetizable manner. Facebook now has 400+ million users and Twitter came out of left field because they stumbled upon a format that allows people to better peacock within the typical short attention span threshold. Little bursts of information along with the “likes”, fan pages, comments, status messages, photos and location check-ins that together build a very accurate user profile to better sell products and services to. Professional FBI profilers must be enjoying this.

You’d have to say that Google got its toe in this water first with Google Groups, a service that allows for online collaboration and information sharing. It was a copy of Yahoo Groups, a successful service that started life as ONEList, merged with eGroups and was bought by Yahoo in June 2000. Yet another company that was well on its way to go public and end-up having to sell to one of the majors. This case is yet another example of Google iterating and improving on, what before that was seen as, an industry standard product/service. They are hoping to replicate that success yet again, this time with the social network category.

Facebook pioneered, and recently received a patent award for, the timeline. In essence it is a sequential list of all the changes, additions and updates in your social graph. Before this, one would have to go to each of their friends profiles to see if/what updates have been published. The timeline includes comments, changes in relationships, new uploaded media, etc. Twitter came in with a basic thesis of distilling the entire social network into a linear feed of messages and the concept took hold. Facebook then tried to buy Twitter and when that didn’t work they simply copied their keys to success and made adjustments to the core timeline functionality. Since then the feed or timeline concept has become the core of all social networks.

So here comes Google with Buzz, an attempt to harness the social network/media aggregation unobtainium – to not only make a useful place for users to combine their social interactions across all sites but to ultimately replicate all the compelling functions and hijack the leadership of the space. It’s too early too tell if they will be fully successful but the community has already embraced this product quickly despite privacy concerns and other negative factors. If some no-name startup achieved the speed of adoption and PR associated with Buzz, they would be called the next Facebook or Twitter. In Google’s case they made it look easy.

Yelp vs. Foursquare and Gowalla vs. Facebook Check-ins (coming soon) vs. Google Local
So where does social media go next? It goes with you and it becomes local. Certainly we’ve had access to all of our social network data on mobile phones but relevancy of data changes based on where you access it. The mere fact of where you are when you are sharing your status, pictures, or opinions is an important data point on its own.

Yelp is a wildly successful business built around user generated reviews of local products and services. It is the business that Craigslist should have been and would have been if it had management that was more smart, more humble and less lucky. Yelp took the first big steps in putting local on the map.

Foursquare and Gowalla debuted in March of 2009 to take local to the next level. They combined people’s undying desire to share and pointed it towards physical locations and events. Foursquare made it into a game where users can earn status and bragging rights by visiting places more often than others or even visiting many places in one day, etc. All of a sudden the local review business evolved.

Yelp felt enough of a threat to quickly replicate the checkin function and enable it to their enormous user base. Rumor has it, now even Facebook is working on allowing this function – it certainly makes sense. We will have to wait and see if the established players can drown out the startups.

Meanwhile, Google has been adding increasingly more functionality to its now industry standard maps application. It got to the point where Google was in talks to buy Yelp for $550 million in December of 2009. That deal fell through as Microsoft jumped in the ring and offered $750 million. Ultimately it looks like Yelp wants to IPO instead. But Google is certainly not giving up on this concept, in fact, it is now circling the wagons and is starting to promote Google Local to its registered user-base and Google Maps web visitors at large. The amount of traffic that adds up to is mind boggling.

Location-dependent data is the next step in the usefulness of mobile. Which equates to finer ad targeting and better ad revenue. Keep an eye on this space in late 2010 and beyond.

GPS (many running on Windows CE) vs. Google Maps (+Google Earth)
It has only been a few years since GPS became available in cars and the world has become hooked. It is a real connection between the physical world and the world of information. GPS makers like Garmin, TomTom, and Magellan have quickly made large worldwide businesses based on these products. After all it is much easier to punch the address into your navigation or just choose a suggested destination then to go to your computer, open a browser, go to Google Maps (which already beat Map Quest and Yahoo Maps) and print out the directions.

Well, now Google Maps comes with you. The iPhone was the first to offer a mobile Google Maps applications with all of its conveniences and boundless access to current information on places of interest and even live traffic. Then came Android adding better turn-by-turn directions than any stand-alone GPS unit, and of course it is free. Next combine that experience with Google Local and your location-based social sharing. While the GPS companies need to sell you some hardware today and software updates tomorrow to stay alive, Google will just serve you some well-targeted ads.

Audi has already announced they will start implementing Google Maps as the in-car navigation software, Mercedes and BMW are not far behind. And just like that, poof there goes another business category into the Google column.

What I’ve outlined above is the just common knowledge of Google’s released products to date. I’m sure this is just the tip of the iceberg, let alone Google’s fantastic demonstrated ability to iterate on products and markets (with the possible exception of Orkut). Google also wants to participate directly in the electricity trade-market, using its mass volume of energy consumption to power data centers as the excuse. Google wants to improve access to and speed of internet connections by subsidizing fiber networks through out the US. Topeka, Kansas politicians even renamed the city to “Google” in an attempt to get press and to be first in line. Google is also investing heavily into bio and health information startups in an unending thirst of Googlifying all the world’s information.

It will conceivably take a perfect storm on the next generational software transition to challenge Google, and it will not be any time soon. Microsoft dominated software in a much simpler time and Google is a couple of points higher on the Richter scale of strategy and market strength. It is a monopoly play unlike the world has ever seen. Werther it is “evil” is still uncertain but it sure as hell is big and scary.

It’s a Google world, we just browse in it.

“The greatest trick the devil ever pulled was convincing the world he didn’t exist.” – Roger “Verbal” Kint