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There's no delete button on the Web
Games with a purpose
Google's secret weapon
It's not an Excel killer, it's the Google Grid
Vonage train wreck realized
Vonage IPO trainwreck
Google and the market for TV ads
Will new entrants bust the online ad market?
Google and the Paradox of Choice
Microsoft adCenter is broken

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Consolidation is coming - 4/21/2006 07:23:00 AM

In the collision course to consolidation post, BuyGoogle explained that consolidation of the information industry looked imminent. At the time, there was nothing in the mainstream media about this possibility, but the Wall Street Journal reports today (sub req'd) that it's already happening. I wrote:

The trajectories of Microsoft, Google, Yahoo, eBay, AOL and Amazon are rapidly converging, and there's not room in the market for all these players. We're going to see some consolidation, which means bidding wars, mergers and ultimately a new internet landscape.

Why consolidate? I said that the industry is shaping up for a big fight that will require massive capital expenditure, and the smaller players can't individually keep up with the blistering pace of innovation and investment. They'll also have to consolidate their user bases, and those who don't dance will be relegated to niche positions after this all shakes out.

With Google looking to spend billions in R&D and capex, and Microsoft throwing around similar numbers in response, I guess you could call this the "Google threat." The WSJ article does:

EBay Inc. is talking to both Yahoo Inc. and Microsoft Corp. to determine whether one of them might be a worthy ally against a common threat: Google Inc.

After years of working closely with the search giant, eBay last year became alarmed as Google started assaulting its turf in multiple ways. In one case, Google launched a classified-advertising service that competes directly with eBay's online auctions and other listings.

eBay is in a tough spot. They need Google because Google has the most powerful ad network -- switching to Yahoo or especially Microsoft could be disastrous for traffic. While Google is essential to eBay's business right now, Google is also seen as the biggest long-term threat. What to do?

Upon hearing of eBay's talks, Google ... offered an olive branch, in the form of a series of proposals designed to tighten the relationship between the two companies. The superiority of Google's search technology makes it a better place to advertise, say people familiar with eBay's thinking.Today, eBay is in a curious position -- negotiating alliances to wean itself from Google while discussing deeper ties with it. Tech companies have long had to walk such a delicate line between cooperation and competition. But these days, Google's clout has magnified the problem.

EBay has "known for some time that Google poses tremendous opportunity in the short term but is perhaps their biggest threat in the long term," says Jeff Lanctot, general manager of Avenue A/Razorfish, an online-advertising agency.eBay is now talking with Google, Yahoo and Microsoft about a range of options, including advertising partnerships and equity investments.

But the WSJ article, which is titled "Behemoths' Dance," does not mention Amazon anywhere, perhaps because Amazon isn't a behemoth. I still believe that Google has some significant strategic vulnerabilities, and that Amazon may be the biggest beneficiary of the coming consolidation.

There are a lot of dumb ideas out there about what Google should do with its cash hoard. Seems pretty clear to me that Google acquired the cash to give it strategic options since consolidation is coming.

The rest of the WSJ article is excellent, and I may post more on it later.

What the analysts missed - 4/20/2006 10:02:00 PM

I could write another glowing post about Google's dazzling results, but I've done that many times before. If you want to read about how rare and wonderful it is that a member of the S&P 500 can sustain an incredible growth rate while simultaneously increasing margins, you can read an old post because I'm getting hoarse.

And since there are plenty of great summaries of Google's Q1 results everywhere, I'm not going to add much to the conversation by repeating them.

After all, the intent of BuyGoogle is to tease out information and trends that aren't being widely reported. Like all the posts about Google TV well before it was accepted wisdom that Google would get into video. Or the recent conversations on game-changing consolidations in the information industry, which I haven't seen anywhere else in the mainstream media.

So instead of vapid praise for Google, here are a couple items I heard in the analyst call that I haven't seen in the press or from the analysts:

Unspent ad budgets -- on the call, an analyst said that advertisers are having trouble spending all their ad budgets on Google. Reportedly, about $1 billion was budgeted but not spent (last year? this quarter?).
Accelerating new product releases -- in last quarter's call, Schmidt and Reyes both said that "the rate of innovation will increase in 2006." In today's call, Schmidt said that Google is the "fastest innovator at scale," and that Google would introduce a large number of new products in Q2 and Q3.
Dramatic capital expenditure -- Google has been investing at a blistering pace in new data centers, spending $838 million in new capital equipment, plus $600 million in expensed R&D in 2005. Already in the first quarter of 2006, Google ramped up investment again, with $345 million in capital expenditure and $247 million in R&D -- more than 40% of 2005's already giant investment in just one quarter. CFO Reyes said analysts should expect the rate of investment growth to exceed the rate of revenue growth -- with revenue growing at 79%, that means 2006 capex of at least a $1.5 billion, and R&D of at least $1.1 billion. That's a *lot* of servers and innovation.

Remember when $700 million was a shockingly high level of capital expenditure? Microsoft now says they will invest "staggering amounts of money" in building the infrastructure to support their Live Drive. With Google's giant head start, and billions more in planned expenditure, there's gotta be a Google Grid in the pipeline.

This kind of investment would be frightening were it not for Google's big lead and proven ability to make massively distributed comptuting work well. Microsoft has a lot to learn about delivering Google-sized information products, and will take years to come up to speed. In the mean time, Google is the only company positioned to own this market. I say Google should continue to invest as fast as they can, because each quarter of investment at Google's pace puts them a lap ahead of the competition.

Update 4/22/06 9:42 a.m. - Here are excerpts from the analyst call on the topic of unspent ad budgets:

Anthony Noto - Goldman Sachs - Analyst
... we hear from advertisers about unspent budgets quite a bit, and we have heard a number thrown around in the advertising community of about $1 billion for Google that people put into the system and don't get spent. Could you talk a little bit about initiatives to unlock that value? ...

Jonathan Rosenberg - Google - SVP, Product Management
... The first issue with respect to the budget is a little bit of a legacy of the way the systems are architected. Advertisers have a strong incentive to put in a budget that is substantially greater than their actual spend. And they do that, of course, because the gross margin on each of the clicks that they receiving from us are positive, and the rate of change in terms of that margin on incremental clicks is pretty close to constant, because it's such a large system. So what the advertisers tend to do is put in an artificially high budget that ensures that, on any given day, their campaigns continue to run.

Now, that said, there are lots of opportunities for us to spend larger fractions of that budget. Certainly, one is to expand the scope of the network and the reach of our sites. But probably the most significant opportunity is just improving the statistical algorithms associated with how we target ads. So anything that we do to ensure that we serve a better ad to one of those advertisers is going to get us more budget and more budget from whichever advertiser is the best advertiser.

So I think, if you run a lot of searches, you'll see actually that although we have the strongest monetization systems in the industry, the ads are actually still pretty primitive. And there are a large number of ways, we believe, to continue to target the ads a lot better.

Sergey Brin - Google - Co-Founder & President, Technology
... we see the greater opportunity is not the people who are under budget, but rather the people who are budget-limited currently. Because for those advertisers, all we need to do is get them to increase their budget limits, which oftentimes are -- they just set it a long time ago, or they didn't really think about it. There are a lot of weird reasons. And they will right away start spending more. So we actually view the budget-limited advertisers as a great opportunity.

Mealymouthed - 4/20/2006 08:22:11 AM

Bill Gates gave a new definition to "mealymouthed" in his inscrutable remarks to Chinese president Hu Jintao yesterday:

It is my belief that industry and government around the world should work even more closely to protect the privacy and security of Internet users, and promote the exchange of ideas, while respecting legitimate government considerations.

What is that supposed to mean? What are "legitimate government considerations"?

I'd have to agree with Chinese foreign ministry spokesman Liu Jianchao that the issue of human rights did not come up during Hu's two-day visit to Washington State. Seems like Gates' remark was meant to mollify non-Chinese voices while saying absolutely nothing to the Chinese.

Google, grocery stores, and breaking bad habits - 4/17/2006 10:10:23 PM

People are creatures of habit, and grocery store marketing is all about making and breaking people's habits. Grocery stores make a small profit on every visit, but if they can get you to incorporate their store into your weekly routine, after a few months that habit can be really hard to break - and amazingly profitable for the grocery store.

Because those habits are very effective competitive barriers, grocery stores spend heavily to reinforce (and to measure) your habit with tools like frequent shopper cards. And competing stores spend just as heavily to break your habit with loss leaders, coupons and other come-ons.

What makes grocery store marketing so tough is that stores can spend a lot to get new shoppers in the store, but if they don't change their shopping habits, it's just a one-time, money-losing transaction.

That's what's so ingenious about Google's cross-promotion with Sony of the Da Vinci Code movie. Not only does Google get to ride along with Sony's massive advertising campaign to get users into Google's store, but the Da Vinci game is amazingly addictive. The puzzles start easy, then get progressively harder each day. The user has to come back tomorrow for the next puzzle, and a small scoreboard charts the user's progress in solving puzzles. This pattern continues for 24 days, culminating in a big prize and 10,000 smaller prizes just before the movie opens.

The user needs a Google Account to play, and what better way to remember to come back tomorrow than through the Da Vinci widget on the Google Personalized Home Page? After a couple weeks of this reinforcement, it's easy to see a lot of habits changing.

I don't care if you call it a portal or not. But Google is breaking the habits of users of competing services to get them in the store, introducing Google's services, then reinforcing their habit of regularly using Google over a period of several weeks.

If only grocery stores were so ingenious.

Schmidtisms - 4/16/2006 10:00:00 PM

I often cringe when Google CEO Eric Schmidt talks, whether on analyst conference calls or to the media. Last year I registered the domain name "googlebabble.com" thinking that I might collect "Schmidtisms" the way some people collect Bushisms. The site isn't live because I don't have the time, not due to a shortage of material.

Google hasn't been known for their PR savvy, and Schmidt often makes things worse when he veers off-script. I'm sure that Schmidt is highly intelligent, and he may even be an effective leader (though I find that hard to believe since communication is so essential to leadership). I find Schmidt's speech to be opaque, evasive, smug, unrealistic, naive, and often empty of anything of substance.

Sometimes Schmidtisms are more dangerous than hilarious. For example, when Schmidt was in China last week he gave trite and fallacious answers to serious questions about Google censoring political expression in China. His words undermined Google's unusually frank and open communcations on the subject until now. Schmidt seemed to lose the sense of anguish over the China decision that typified other Google communications on their difficult decision, and he came off sounding flip and perky about a very weighty issue.

But it wasn't all bad news. At the same event in China, Schmidt actually said something quoteworthy about innovation:

Mr. Schmidt downplayed competition in the China market, sidestepping questions about Google's strategy vis-à-vis its main Chinese competitor, Baidu. "Everyone is focused on competition," he said. "Instead you should be focused on innovation.

"In a zero-sum market, competition is how you win," he added. "But in a market that is expanding this quickly, the way you win is through innovation. An innovator can come in and very quickly change all the dynamics. And that can be done by us, or to us."

The information business isn't a zero-sum market anywhere. So while some competitors throw chairs and want to kill Google, Google's relentless focus on innovation for users instead of running the competition into the ground will keep them ahead. Because if you can go fast, no one will ever catch up.

So I guess not all Schmidtisms are hilarious or dangerous. ~~Some of them are actually written by others.~~

Update April 17, 2006 10:20 PM: Re-reading this 24 hours after posting, I think some of my criticisms of Eric Schmidt are out of line. While his style really rubs me the wrong way, and his smug indifference on the China question is dangerous for the Chinese and for Google, that last sentence wasn't warranted by any facts.

Google dreamin' - 4/16/2006 10:50:00 AM

Philipp wants to know the top three features you want from Google. Here's what I think would make Google unstoppable:

Google Grid a la EPIC - store any information including blog posts or photos or video or spreadsheets or calendars; access control to keep each item private, share with selected individuals or groups, or share with the world - for free or for a fee; all content indexed, linkable, searchable; social recommendation engine to surface the good stuff and hide the junk; feeds to subscribe to editors you trust; transparent language translation; AdSense rev share to compensate editors and content authors.
Privacy Control Panel - explicity opt-in or opt-out of the various data streams that Google captures about you; allow each user to decide the right balance between privacy and functionality for them.
Device like TiVo or rumored "Google Cube" to play content in my living room.

The concept of the Google Grid is powerful and frightening at the same time. Without the Privacy Control Panel it would be a nonstarter - the resistance from interest groups, national governments and competitors sowing FUD would doom the project without the ability for individuals to decide for themselves what privacy tradeoffs they're willing to make.

That's not too much to ask, is it?

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