Google: now what?

So it wasn’t quite a return to dot-com hysteria, but Google’s IPO generated the requisite amount of hype and about $1.75 billion in expendable cash for the company. So now what? How can they possibly justify their completely insane market cap, which, as The Reg noted, would require 30% revenue growth and 30%+ margins for the next fifteen years (and that was back at the stock’s pre-IPO value of 85….)?

I think Cringely’s close, in that he mentions digital media. But he, like most everybody else, does not see that Google’s future cannot be tied to search. No way. Microsoft will make Google’s search capabilities irrelevant within five years.

Don’t get me wrong–I’m not saying that Microsoft’s going to come up with an equal or better algorithm for accurate Web searches (in fact, I think they’re grossly underestimating how difficult this task is). Rather, Microsoft is going to change the entire notion of what search means. Within two years, they will have integrated search tools into Windows that not only return fairly good results from the Internet, but also results from local and networked files, e-mail stores, and databases. (MSN’s already working on this, and will have its first desktop-based e-mail and local file search tool out by the end of 2004.) And as Google’s prospectus so carefully noted (see page “20 of 161” of this PDF file), Microsoft has leverage that Google will never have–think about how easy it would be for Microsoft to make changes to Office formats so that its own search tools can quickly and easily index data within documents and spreadsheets, while blocking third-party tools from doing so. Extrapolate to SharePoint, SQL, and other Microsoft technologies.

So think forward to 2007. Which would you rather use, a tool that’s accessible from any Windows application and the Windows shell that returns results from any conceivable store of data (Internet, intranet, local, networked) or multiple stores simultaneously…or a Web site that only returns results from public Web sites? Oh sure, Google might release desktop search tools as well, but they won’t ship with or be fully integrated with Windows, they won’t access the same breadth of stores as Microsoft’s tools, and nobody will use them. Netscape redux.

So forget about search. In fact, Google’s algorithmic search engine isn’t even that important from a business point of view–it’s just the glue that draws users to the site and gave them the pop-cultural relevance to raise more than a billion dollars in a stock offering–at a P/E ratio of more than 100 to 1. (This is a company whose only significant source of revenue–paid search–is a business model that was invented only about 5 years ago! By a company to which Google recently and quietly agreed to pay a royalty!!)

No, the real key to Google’s business is its advertising technology–technology that analyzes what a user is looking at (search results; a third-party Web site that participates in Google’s AdWords program; a message in their Gmail inbox) and displays relevant advertising. Sure, there’s grumbling by some advertisers that they aren’t getting enough bang for their buck, but by and large the program is very popular, and will only become more so as bigger businesses spend more and more of their advertising budget online. Their other asset is their infrastructure which, thanks to the $1.whatever billion in cash, they can continue to expand at a rapid clip. (First bet: this is where their money goes first, not to acquisitions.)

Now look at what Google did with Gmail. Hotmail and Yahoo were piddling along, allowing their users 2MB and 4MB of maximum storage and trying to charge users for anything even the slightest bit useful when Google announced Gmail would offer 1GB of storage. It seemed crazy. People thought it was an April Fool’s joke. But suddenly, storage for Web-based e-mail isn’t a consideration anymore. They changed the game in days.

Now imagine Google offering, say, 20GB of storage for all your personal digital media files. Pictures from your digital camera. Songs you’ve ripped from your CDs (or bought online for that matter). Movies you’ve taken at home or downloaded (or ripped from DVD using illegal software, for that matter). Instead of paying $300 for a cute little portable device that only plays audio, or $500 for a clunky device that plays video, both of which you have to hook up to your PC every time you want to transfer new content and that try to promote the specific proprietary file formats that benefit their creators…you’ve got access to all your digital media files, any format, from any device with a sufficiently fast Internet connection, anywhere in the world. For free. All you have to do is look at (or ignore) a little advertisement in the right-hand column when you call up that trio of songs that scared the piss out of you during one of those reaAAAlly long weekends back in college. I’m thinking something similar to what Mercora offers now, but hosted instead of peer-to-peer.

Sure, there are some big hurdles to work out. Everybody would need to agree to some sort of royalties scheme–particularly if the content were downloadable–so the content owners wouldn’t freak out and sue Google out of existence like they did with Moore’s law would have to keep going so Google could afford to keep adding storage (Bill Gates has been making that bet for 25+ years and hasn’t lost yet). Broadband would have to become standard (already happening). 802.11a or some other broadband wireless technology (WiMax?) would have to become ubiquitous so users could listen on portable devices from more locations.

Interesting, no? Now imagine doing the same for other types of data–documents, spreadsheets, data from corporate apps. Imagine new types of hosted applications for individuals and businesses– writ larger and broader. Google’s only future is in doing what Microsoft will never do because it’s not part of their business model–replace the world of the PC and “smart devices” (expensive, large footprint, lots of processing power and memory) with hosted services accessible from any cheap dumb box with the right kind of connectivity. It’s been the dream of the Web since the days of Netscape, and if Google isn’t capable of realizing it, nobody is.


One Response to Google: now what?

  1. Barry says:

    Thoughtful post. Curious what Sergey thinks about these different options.

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