Jun 15, 2008
Well, I say yes. There's more money potential in narcotics than anything else we're looking at. Now if we don't get into it, somebody else will. Maybe one of the Five Families, maybe all of them. Now, with the money they earn, they can buy more police and political power – then they come after us. Now we have the unions, we have the gambling, and they're the best things to have. But narcotics is a thing of the future. And if we don't get a piece of that action, we risk everything we have – I mean not now, but, uh, ten years from now.
Not entirely appropriate but I though it will be fun to quote from that movie. Oh I forgot to add that you were supposed to read above quote by replacing "narcotics" with "scalability".
To continue glorious tradition of adding 2 cents, I am adding my worth in this debate about Google and Yahoo advertisement deal. There are many insightful posts interpreting this deal. Michael Arrington thinks Google will come out more dominant and will be a big monopoly to reckon with. His point about network effect favoring Google in the long run is right on money.
That's a great line and should guide all companies relying on user interaction and user data. Google is a great company and passes this test by many miles. Google is also a company which has managed to have amazing combination of short term execution and long term vision. Call it DNA thing or just plain old SAT score, fact is these guys get more quality code checked-in at the end of the day. When I put this realization about their brain power with Yahoo ad deal, I get different feel about the whole ecosystem. Google is running a huge commodity train against mature companies.
Specifically, I disagree with Tim's last two points:
3. The real source of my argument for this position, which you linked to in your piece, but I'll point to again here, is that Web 2.0, the internet operating system we're building, is much bigger than search. Search is an incredibly powerful subsystem of that OS, but it is just a subsystem. There is lots of competition across the system as a whole, and we're a LONG way from the concentration of power that represents monopoly when we take that into consideration.
4. The landscape is changing so fast. To take only one axis, consider mobile. Google doesn't dominate mobile/local search. That's a whole new game…. Again, there's lots of competition.
Search market has to be redefined to reflect new reality of information politics. I don't think Google is in search market alone. To say Google is a search company is to insult their imagination. Google is in a market to build services to search the world of information. They are not subsystem, they want to be THE system. I don't have data point on this but I suspect Google owns the world's biggest bandwidth hog – YouTube. Amount of meta data they are capturing in that loss-making venture is just staggering. That's not search.
Other point which is missing from debate is how Google is using scalability as a power to extend it's network effect. Scalability is a real deal now. Services are supposed to address global market and scale is a critical component of that design. No other (yes including Microsoft, their ass is getting kicked and they are innovating on business model now!) company can match Google's ability to scale data centers.
In a way this scalability advantage will dramatically reduce probability of any new player coming and threatening their core search business. Take aviation industry, knowledge to make commercial airplanes is widely available but how many companies are able to successfully run that business? Just two! Boeing and European (heavily tax-incentivized) AirBus. Same example in capital intensive microprocessor business. High cost of fabrication makes that business painfully unattractive to new players. Intel still rules.
On "landscape in changing so far" point, I think there is a theme running in opposite direction. Few things are not at all changing. Need to better scale data management, security, performance, user experience etc. They are old challenges, we are still dealing with them. Google, with their superior execution talent, is using scalability to successfully tackle these challenges. Their smartness is in converting solutions into platform services so other companies can leverage them as well. That strengthens Michael's network effect point.
You can have new game but it will eventually hit a bottleneck. Either it will be a scaling bottleneck (Twitter and Mobile search for non-Google services) or inefficient monetization bottleneck (Myspace/Facebook and other mobile apps). Companies will figure out solutions but I am hard pressed to imagine a scenario where new company can upstage Google without disrupting Google's scalability innovation. This same scalability strength is giving them advantage in efficient monetization.
Coming back to funny Godfather quote. Pretty much all leading company execs can be expected to echo Tom's stern warning –
And if we don't get a piece of that action, we risk everything we have.
I care less about Microsoft and even less about their attempt to buy Yahoo. I was rooting for Yahoo as a totally independent company, strong enough to counter Google on scalability as well as do-no-evil. By selling out to Google, they lost moral right to provide that necessary counter weight. Microsoft's DNA is running at discount, Yahoo has sold their innovation right to Google. Now we are left wondering who will provide necessary competition to Google.
BTW if I am holding a portfolio of innovative startups, this transaction represents welcome relief. Yahoo cannot innovate their way into future, they need to buy new companies and their independent existence will allow them to compete in startup M&A market.