Google’s Economist Clarifies Transparency
July 7, 2008
My hard copy of the venerable New York Times and my news reader made it difficult for me to overlook the essay by Steve Lohr, another in the growing cadre of Gray Lady journalists covering the Google. “Google, Zen Master of the Market” is a benchmark in mass media’s discussion of Google. This addled goose cannot summarize the article; however, I can identify one key point and offer several observations. (You can get other views such as Clickety Clack’s here or Ross Mayfield’s here.)
Before identifying the crux of the analysis for me, I want to congratulate Mr. Lohr for skipping right over the lava lamps and the free Odwalla beverages, the great free lunch, and the wacky antics of the world’s smartest people. That is a refreshing change in my opinion. Please, let this editorial policy stick.
The Key Point for Me
Now, the crucial point for me in my hollow in rural Kentucky. Mr. Lohr writes:
Google, it seems, is the emerging dominant company in the Internet era, much as Microsoft was in the PC era. The study of networked businesses, market competition and antitrust law is being reconsidered in a new context, shaped by Google. Google’s explanation for its large share of the Internet search market — more than 60 percent — is simply that it is a finely honed learning machine. Its scientists constantly improve the relevance of search results for users and the efficiency of its advertising system for advertisers and publishers.
I agree. Please, read the entire piece in the increasingly hard to find paper version or the pop up ad covered online version here.
What’s striking about this passage are its assumptions, compressed like bits in a tarball. For example, here’s how I interpreted some of the words in this passage:
- “Seems”. Mr. Lohr is reluctant to come out and say that the Google is search, a monopoly, and still growing as a reasonable clip even in the lousy economic environment that has [a] destabilized poor, old Yahoo, [b] squeezed competitors in enterprise search, [c] chilled the blood of Verizon-type companies, and [d] triggered in Microsoft some pretty wild and crazy business actions such as paying for traffic, buying search technologies that are probably impossible to integrate, and putting its share price right in the middle of the “value stock” category;
- “Emerging dominant”. Mr. Lohr and other pundits cannot grasp the fact that Google is not emerging. The company is now 10 years old and getting close to puberty.
- “competition and antitrust law is being reconsidered in a new context” hip hops over Google’s operating as a supra national entity that is tough to regulate. Think about set theory. Google just isn’t in the set in which most regulations were designed to work. Anyway, by the time regulations are Google-ized, Google will be different.
- “Learning machine” is a nice way to say super computer with systems and methods that are automatically able to stay one step ahead of most users, most competitors, and most regulators. The more people use the Google, the more expertly the Google morphs into Google subscript n+1. Stated another way, you can’t pull the plug to allow the competition to catch up. Only a pile of lawyers can trip the Google at this time. To catch Google, a competitor has to stop Google’s “motion”. Failing that, closing the gap requires solving the “bridge” problem with which I close this essay.
Okay, I am tired of this little exercise in deconstruction.
My Telco Experience and How It Relates to Mr. Lohr’s Analysis
One final point before I offer some observations. Remember your university economics class. I sure do, and I don’t have a clue what my professor talked about. I graduated at or near the top of my class with a Summa cum laude designation from an unknown university in a corn field, but I remember the “cloud of unknowing” that settled over me.
An economist explaining transparency strikes me as amusing. Wait. Not amusing. The combination is like a a pause in Waiting for Godot. Google appears to be talking more. Whether it is the Excite and JotSpot founder Joe Kraus to Jeffrey Dean explaining for the umpteenth time how MapReduce works to Eric Schmidt explaining how to fix American innovation–these are efforts to humanize an entity that is not accurately perceived.
Let me give you an example. Ask your broker what business occupies Google. She will tell you that Google is a Web search company that sells advertising. Yes, the revenue comes from millions of people competing to buy key words displayed to user’s of Google search. Business school wizards at Harvard and Wharton will tell you that Google’s other revenue generating attempts have not as yet generated substantial revenue. Ergo, as Steve Ballmer accurately asserted, Google is a one-trick pony, or as I prefer, a one-trick Googzilla.
Now, I have written two studies–The Google Legacy (2005) and Google Version 2.0 (2007) which you can buy here–that argue Google is a company with a business model that is manifesting itself in this “advertisers pay” character that Wall Street loves so much. My research asserts that this business model is extensible to other business sectors. When pundits narrow their vision to the neighbor who sells quilts with AdWords, the bigger picture is blurred. Google’s disruptive force is the seeping of its business model into other business sectors; for example, mobile telephony.
I did a few briefings for telco senior managers. After my review of Google’s hook-them-when-they-are-young strategy, the telco executives snorted. College students were perfectly happy with the existing mobile services. Then I explained Google’s “pull strategy” where traditional direct sales is not emphasized. The telco executives explained that store fronts, promotions, and TV advertising were the keys to success. I explained that Google had dabbled with some unusual telco-related technology as early as 1998. The telco executives laughed and said, “We have decades of technology and no one can leap frog us.” In short, Google’s nine years of patent applications, technical papers, and presentations were dismissed as trivial, amateurish, and irrelevant. “Wow,” I said to my colleague who witnessed these reactions. “How can Google hire people from Bell Labs, let them innovate, and then dismiss former telco wizards as dorks?” Telco executives just did not make sense to me.
So what happened after my briefings?
Sprint swizzled into financial muck. Verizon got tangled in an auction and had to concede to open a tiny bit of its business to outsiders. The outsider (the Google, of course) became the camel getting its nose in the telco tent.
Now I have been around camels quite a bit for a Kentucky lad, and you want to keep these beasts out of the tent for sure.
Then Google rounded up two dozen partners in telephony. Next Google rolled out a beta mobile operating system. A developer conference followed. In short, by not doing much of anything that works by an objective yard stick like counting ad revenue, the Google has destabilized mobile telephony triggering wierd stuff like Nokia’s buying Symbian and indicting that it would become a software and services company.
You can read more about Google’s impact in my studies, and I think you can see that the business model is more abstract and therefore significant than selling online advertising. What is this business model? Again, some analysis appears in my studies, but it is larger, more potent, and more impactful than twisting Mr. Ballmer’s plans for online search.
Let me conclude with three observations:
- When the calculus swept Europe, mathematicians had to use it because it worked. Doing stuff with zeros was illogical, but it worked. I think Google is this type of contribution to business. Economists–even those working at Google–don’t have the tools to understand the Google calculus, but, hey, it works.
- Analysis of Google–after 10 years–is beginning to become more rigorous. My hope is that the trend continues. No, Google is not making anyone stupid. Lots of people are already stupid, and Google is an entity that can derive benefit from stupid and brilliant people. Right now, Google’s ability to do this is orders of magnitude more efficient than its competitors’ instrumentality.
- Perception of Google will remain difficult because the company is polymorphic. The rate of change in the systems and methods is modest, but when an adjustment occurs via its “finely honed learning machine”, it is difficult to perceive its effects. This is not a “network effect”; it is a different type of behavior, closer to nuclear physics than analogies about the value of facsimile machines.
The good news is that more thought is now being given to the Google. The bad news is that the pundits are starting a decade behind. I could explain how this works with more references to calculus, but I will not. Here’s an analogy. To catch up with the Google, a competitor needs technology, people, and money. No problem. The absolute is time.
Google has changed the time value for its competition by using fast local changes within larger chunks of time; for example, Google Talk versus the Android developer play–each with a different time to payoff clock.
Stick that ploymorphic stuff into a traditional economic model and what emerges is one of those problems in getting from here to there without a bridge or the materials to make a bridge.
In short, the Google is one place. Everyone else at this point in time is somewhere else. Pretty clever, no?
Agree? Disagree? This backwoods fellow can still learn. Just include pertinent data, not that stuff from college econ classes.
Stephen Arnold, July 7, 2008