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Should Google emulate Microsoft?
A regular column on the information industries
Should Google emulate Microsoft?
For most of the past decade, Microsoft has dominated the “new economy”, crushing its rivals while constantly at loggerheads with regulatory bodies around the world. So dominant has it been, that until very recently few have bothered to note the surging value of what started out as a modest search engine, namely Google. At the end of October 2007, Google’s share price exceeded $700 for the first time, having exceeded $600 only on 8 October, and the company was valued at $220 billion. When it first went public in mid-August 2004, the price was a mere $85. Google is currently worth more than Yahoo!, Amazon and Ebay combined, and while still trailing Microsoft (which is currently worth $346 billion), it is worth noting that Microsoft was valued at more than ten times as much as recently as March 2005.
Google currently commands a price/earnings ratio of roughly 35, the sort of figure generally associated with the 1998-2000 boom but hardly a commonplace in the existing financial environment (although yet-to-become-profitable Facebook is evidently valued at $15 billion). Yet this ratio is not completely off-the-wall because Google is expected to make an operating profit of $5 billion in 2007, a 50 per cent improvement on 2006, and its share of the global search market runs at 65 per cent. What is particularly notable about this figure is that whereas Microsoft’s software comes built into computers, and is hard to avoid unless one is a die-hard Apple fan, Google users can switch very easily to an alternative search engine even if they are partly discouraged by personalized Google home pages.
Companies like Google are not simply measured against their historic records, no matter how successful, but against the viability of their future strategies that must contain new sources of profits. By implication, Google cannot sit on its laurels as the top search engine. So where does its future lie? One major battleground looks set to be social networks. In effect, through its very recent purchase of a small (1.6 per cent) but expensive ($240 million) stake in Facebook, Microsoft lay down the gauntlet. With over 50 million users, Facebook already appeared to be the clear market leader, and had cemented that status by permitting outside developers to produce applications for the site in May 2007. However, Facebook employed its own proprietary technology, so this material could not be used elsewhere on the web. Noting this Achilles Heel of sorts, Google set out to develop OpenSocial technology that seeks to lay down a standard for use on any network. Linking up initially with twelve partners including Oracle and a number of social networks such as Hi5 Networks and LinkedIn Corp., Google subsequently pulled off something of a coup by inducing News Corp’s MySpace, Facebook’s main rival, as well as a further significant social network, Bebo, to join the OpenSocial alliance.
While Google’s social network activities have been modest in the US – hence the need for powerful partners – it does have a significant presence in the likes of Brazil and India where it operates as Orkut. Hence, in addition to the 200 million Internet subscribers to which it now had access in the USA, it also had a superior worldwide network compared to Facebook. While the likes of Yahoo!, Ebay and Amazon also host some social networking activities, they are unlikely to alter the balance of power significantly whichever – if any – side they choose in the forthcoming battle. Facebook may or may not now adopt OpenSocial, but history indicates that open standards tend to defeat proprietary standards in the majority of cases.
The other arena in which Google is flexing its muscles is mobile communications. In principle, Google can be seen as a disruptive force because in early November it launched a Google-designed software and services platform – known as Android – which can be used in a wide range of mobile handsets. Ordinarily, the likes of Nokia would hardly be quaking in their boots, but Apple has recently launched the iPhone with considerable success and the last thing traditional vendors need is another CEO of a massively resourced company stating that “it is really important … that there be lots of choices of devices and networks be open”, especially when it has persuaded the Federal Communications Commission in the USA to alter the rules of its forthcoming auction for spectrum in the 700 MHz band such that a large chunk of that spectrum should have “open access” conditions attached to it – conditions that would prevent the winners from restricting the type of handsets or software used on the resultant network.
Google may well not bid for that spectrum, and it will almost certainly not seek to launch a range of Google-branded handsets. Oddly, perhaps, this is because Google has a major incentive to operate in conjunction with existing industry players – it is not usually a good idea to proceed via threats of destabilization – while in the USA the likes of Verizon Wireless, Sprint Nextel and T-Mobile USA, locked out of the iPhone deal and offered lower licensing fees than the industry norm, have much to gain from linking up with Google using an open Linux-based standard that will provide an incentive for third parties to develop new applications. In fact, Sprint Nextel is already partnering with Google to develop software for devices that will operate on Sprint Nextel’s new high-speed WiMAX network – the companies intend to construct a new mobile portal and to share the advertising revenues that it generates. Given the fierce opposition of Verizon Wireless to the FCC’s open access rules, its willingness to negotiate with Google indicates the ultimate need for a pragmatic approach in turbulent times.
Indeed, Google’s apparent willingness to be co-operative has already paid dividends since, in addition to Android, Google announced the formation of the Open Handset Alliance with 34 initial members including Motorola, Samsung, DoCoMo and T-Mobile. By implication, it is Microsoft and Nokia that are perceived as the real threats with a desire to lock the market into their proprietary platforms although the latter has made some concessions to open standards with its Series 60 platform. However, they may not be the only ones since, for example, Verizon Wireless announced in November 2007 that it would be opening its network to all devices and internet applications during 2008, although it seems unlikely in practice that this will apply to any device (such as a Skype handset) that threatens its existing business model.
Nevertheless, there is one obvious downside to becoming too visible which is that it attracts the attention both of litigious rivals – for example, Google is currently being sued by Viacom for $1 billion in respect of its YouTube video-sharing service – as well as regulators. Regulators have spent a good many years chasing Microsoft through the courts, and are still pursuing their prey. However, it is worth noting that they only began to log up real successes after Microsoft’s power began to wane. They are now happily pursuing Google. They are particularly interested in Google’s proposed takeover of DoubleClick. Whereas Google has a large share of the market in text-based web advertising, it is not a substantive player in the market for display and graphic advertisements that appear on websites. It wants to acquire DoubleClick because of the latter’s role as a broker between Google and its competitors and customers who wish to advertise. DoubleClick places advertisements on web sites and tracks hits and click-through rates. In that respect, it would face competition from Microsoft/aQuantive and Yahoo!/RightMedia, but the European Commission for one is concerned that Google/DoubleClick will become too powerful and accordingly launched a full-scale antitrust investigation in November 2007.
Google is increasingly being harassed all over the world. In Australia, for example, the Competition and Consumer Commission has filed a complaint relating to the design of the results pages that Google returns in response to a search request, accusing Google of blurring the border between “organic” search results and the advertisements that run alongside them under “sponsored links” headers. Naturally, it may be argued that being harassed is a sign of success, but a stream of court cases does divert management time and effort away from more productive pursuits.
Meanwhile, Microsoft is predictably denigrating its new rival, claiming that companies have core competencies and that they are better off sticking to them and avoiding conflict with other industry players. But it is almost certainly too late to present such an argument because the very nature of the Google model is incompatible with current practice. Whereas mobile operators normally provide a standard package for a monthly fee and charge extra for additional features, Google gives its services away for nothing and makes its money from advertisements on the web site. Advertising directed at mobile handsets is potentially a multi-billion dollar market, and the Apple model is also groundbreaking in that it obliges partnering operators to hand over a share of their revenues to the handset maker for the first time. The Google CEO has indicated that its widespread adoption of such a model is “highly likely”.
A mere year ago the mobile industry was trundling along, making money from subscribers with no option other than to churn from one operator to another providing much the same services. One year on, Appled and Googled and in no condition to resist the forces of change, the industry will never be the same again. But as noted, becoming the new Microsoft may have its downside. Google at $800 a share? – we shall see, but the share price registered $730 when Android was announced. Google in the courts? – an absolute certainty. The Open Handset Alliance a success? Maybe – alliances are easy to form and easy to commit to before money has to be laid on the table, but at that point some may well decide that it is more profitable to go it alone.
Peter CurwenVisiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK. E-mail firstname.lastname@example.org