Calling the Zenith of any growth curve is always hard, and calling the Zenith of a smart company like Google is one of those "gulp" moments, but I think we are now in sight of it (and by in sight I don't mean right now, but in a 1 - 2 year horizon) - for 4 reasons:
Firstly, the Content Owners are starting to organise themselves.
In the recent brouhaha over instream Ads on Twitter, the Ad.ly CEO wrote a defence of the practice. Overall its a seductive hymn for Twitter to turn its assets over to commercial rapine by a 3rd party (if Twitter do this they are daft in my humble opinion, but that is another story - see my worry that they have
Missed The Cluetrain), but one of his points was well made:
3. In-Stream rewards the content producer, Contextual just the technology provider – The funny thing about contextual search like that in Google is that it benefits the tech company and NOT the content producer at all. Think about this – bands and stars helped bring people by the millions to MySpace. Having amassed a following they realized that MySpace was able to put ads everywhere and make all of the money. Same goes with Google. All of us bloggers and journalists create content that gets indexed and allows Google to serve up ads alongside us that we don’t benefit financially from. When a content producer promotes an ad in-stream the revenue flows mostly to the person who published the content.
My Italics, but that is really what has happened for the last 6 years or so - Google has managed to pinch a lot of the surplus from other parts of the value chain. But the others are starting to fight back. The push by News International to get Mainstream media to de-list from Google is the latest and most public salvo in this war but it won't be the last. The Mainstream media is hurting badly, and - given the alternatives are pretty bleak - one option is to force Google to hand some of the surplus back by taking away their bat and ball elsewhere, reducing Google to search the "Long Tail of Crap" that is the rest of the Web (as far as the mainstream market is concerned, anyway). In fact, the latest twist in the tale, that Microsoft and News International are
reaching a pact to delist from Google and go exclusively elsewhere, also illustrates the second trend:
Secondly - Better Competition is emerging
Microsoft's Bing search engine, and other niche search applications like Real Time search are starting to chip away at Google's stranglehold on search - and more importantly, Ad revenues. The attempt by Microsoft to de-list News International from Google and pay it to be on Bing is the latest - and by far not the last - foray by other people's tanks onto Google's well manicured lawns. This matters for 2 reasons:
- Google's share of the Ad market starts to decline as others take a greater % of it - this may even add up to a real revenue decline as Google has no other source of income
- The margins of Advertising fall as competition increases
This will hit revenue, increase costs and reduce earnings - so Google stock price falls, market sentiment shifts and a whole load of positive reinforcing loops fall away. It also puts more pressure on Google's main strategic weakness, ie its inability to find revenue elsewhere.
Thirdly - So Far, Google has been unable to make money elsewhere
Google has used its huge surplusses to build out businesses in a large number of other areas, but as yet none have been successful except maybe YouTube ( though it will have to start making money soon as the world moves to far more expensive-to-serve HD formats). Every time Gmail goes down another nail is driven into its Cloud services. Its architecture, though formidable, is optimised for text search so its acquisitions struggle to get integrated and the Google culture seems too strong to allow them to succeed once acquired anyway. (And in fact YouTube highlights something else - most home grown services in other areas are poor - that they now acquire most of their Innovation speaks volumes about their ability to innovate a way out of the Ad Biz.)
Strategically the risk they now face is that they have opened up wars on multiple competitive fronts but funding to carry them out will start to drain away. The problem is, the people they have attacked are now all mustering their tanks and will probably rather relish carving up bits of Google's lawns for themselves.
Fourthly - Consumers are starting to understand the privacy implications of Google's Datamining
Due mainly to the avaricious behaviours of other johnny-come-later companies trying to mine the consumer datastream, a better user understanding is emerging of what user data Google has, and what it does with it. From a slow start, this has started to worry users and they are reacting in 3 ways:
- Using other services that do not seem to compromise them so much, and tools to help (the VRM movement being typical of this counter-cycle)
- Demanding legislation to protect their interests - so far more prevalent in Europe than the US, but this is a trend that won't go away soon
- Asking for open-ness of the data so they can control its use better
All these activities curtail the value-add that Google can put on its Ads.
These trends do not mean that Google withers on the vine of course, just that its 5 year hegemony is coming to an end as the rest of the value chain works out strategies to reclaim some of the surplus, as competitors work out the chinks in its armour, and as customers start to work out what they do want. By and large Google has used its Ad money to subsidize sub-priced entry elsewhere, now others are using the same tactic back to hits its core revenues in advertising.
Strategically, this puts them on a back foot. Here are some predictions for the next 3-5 years:
- Increased spend on Marketing and Lobbying - every embattled incumbent reaches for legislation, Google will do so too. The Net Neutrality loony fringe will go into overdrive, as will the "MSM are dumb sh*ts" chorus and the "Ads are Good and Natural" apologists, but the real work will be on limiting the impact on data storage and mining.
- Exiting some of the areas they have been in - so far they have tended to cull them, but we may see them spinning stuff off or out, or even joint venturing in attempts to create value from sunk investments.
- Start buying "real" businesses with non Net-Ad revenue streams while its share price is still very highly valued (When this happens, that is the main sign that this analysis is accepted by teh company itself)
- Company culture shifts from Geeks to Commercial people, from innovation to sales, and operational excellence (aka cost cutting) takes a bigger role. The bright young things leave for newer, shinier things, but every blue-blazered MBA wants to join like they once wanted to be in P&G.
Its all part of the inevitable circle of (economic) life, the difference is that when it happens to Google, then a few Internet Economy myths will hit the floor too - Free(Con)omics, Network Effects, Do NO Evil Corporations - will all be shown to be things that happen in times of early rapid growth, before Darwinian competition for a profitable niche emerges.
We could be wrong, of course....but I think we've called it about right, give or take a year it will seem clear.
Update -
nice rebuttal by the very clever Graeme Pietersz, essentially arguing the competitors won't be good enough and consumers will always be just dumb sheep. May be right, but in my view the competition sucks a lot less than just a year ago and consumers seem to be slowly waking up. As I said, we'll know in a year or so - the Ad market will be the driving factor,
