(Mis)understanding Google

It is always good to read a Nick Carr post over morning coffee, especially one you can take issue with . Nick has written here (and in more detail here) about how Google utilises Complementary goods to drive its own demand:

Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes. In addition, as Internet activity increases, Google collects more data on consumers’ needs and behavior and can tailor its ads more precisely, strengthening its competitive advantage and further increasing its income.

And thus Google is motivated to reduce the costs of the complements and therefore increase the demand:

It’s this natural drive to reduce the cost of complements that, more than anything else, explains Google’s strategy. Nearly everything the company does, including building big data centers, buying optical fiber, promoting free Wi-Fi access, fighting copyright restrictions, supporting open source software, and giving away Web services and data, is aimed at reducing the cost and expanding the scope of Internet use. To borrow a well-worn phrase, Google wants information to be free - and that is why Google strikes fear into so many different kinds of companies.

There are two main issues one can take with this approach:

Firstly, this is just another Fox and Rabbits ecosystem model - the problem for the GoogleFox is when all the rabbits are eaten (ie the price of information being near-zero drives information providers out the market). Can this happen - possibly, the total global Adspend (about $0.5 trillion) is not nearly enough to fund all services which today are paid for via subscriptions of various types, even if it were all online (only c 13% though rising at present). Google's own strategy appears to be to corrall rabbits - ie own or control access to a lot of todays' existing content - but we suspect even Google cannot Bunker-Hunt the whole Information market.

Secondly, the virtuous Googlenomic circle only works while they have search hegemony (see our note last year). Once there is search competition, then value can be added via premium complementaries as a differentiator, and the competition for Adbids sees profit in Ads slip away.

Competition is therefore something that interests Google exceedingly - they like it so much, they buy it up ...Sez Nick:

Many of the most innovative and successful of Google’s new ser­vices are, in fact, ones it has acquired rather than created. Those include the hugely popular video-sharing service YouTube, the Weblog publisher Blogger, the virtual globe Google Earth, the online word processor Writely (renamed Google Docs), the wiki developer JotSpot, the news syndication service Feedburner, and the Internet phone service GrandCentral. When it comes to innovation, Google is starting to look less like a sower than a harvester, less like an inventor than an exploiter.

With the purchase of Doubleclick its moving from Exploiter to Monopoly though.....anyway, Nick concludes his longer piece with:

Above all, Google teaches us, through both its successes and its failures, that smart companies — the ones that are not only consistently innovative but consistently profitable — exhibit three qualities. They hire talented people and give them room to excel. They measure progress and results rigorously and make course adjustments quickly. And they remain disciplined in their work and their spending, curbing the instinct to do too much at once. Of course, that sounds less like a radical rethinking of business verities than a restatement of them. Which brings us to a further lesson: Beware the inevitable hype about how the latest business trend or the newest overnight success “changes everything.” Yes, markets and technology change, sometimes with devastating speed, but through the turmoil, the underpinnings of business success remain fairly stable

There is another great success factor not mentioned though - market dominance. Question is - is this an industry where competition can grow naturally, or does the law of increasing returns mean that Google will keep first place unless it does something extraordinarily stupid (or stops buying all the promising small New Search companies). We rather suspect the latter is the case, given the small and waning share of any serious competition, in which event a more careful examination from an anti-trust standpoint is advisable.

(Don't get me wrong...I'm a Googlefan...its just that power corrupts, and absolute power....)