Why Google is F****d(*)

(I’m finally putting this up after i read the fake report that Facebook was testing a new web search box on its homepage.  Fine, it was a fake, but let’s be clear - Facebook will do search.  And they’ll do it well.  So without further ado….)

Not too long ago TechCrunch asked, “Do you think Google should feel threatened?”  My answer then:  "yes.“  But let me elaborate.  Google is f****d.(*)  And here’s why….

[[MORE]]Every Company Gets F****d Eventually

Every so often tech leadership rolls over.  You’ve heard this before.  IBM to Microsoft…. Microsoft to Google….  Blah blah blah.  And each time the questions are nearly identical:  If IBM builds that product, Microsoft is finished.  You may not remember the conversation, but it happened (bonus points for anyone aside from me that installed OS/2).  Surely you will remember, "What if Microsoft challenges Google?”  (To be fair, Microsoft challenged a lot of companies, like Netscape, and won, but I digress.)  In fact, earlier on it wasn’t even Microsoft that concerned the pundits about Google; from Business Week in 2000:

“…how will Google ever make money? There’s the rub. The company’s adamant refusal to use banner or other graphical ads eliminates what is the most lucrative income stream for rival search engines. Although Google does have other revenue sources, such as licensing and text-based advertisements, the privately held company’s business remains limited compared with its competitors.”

Search and replace in this and similar articles…. Microsoft for IBM, Google for Microsoft, and so on, and the questions are nearly the same.  And yes, this time it’s all about Facebook.  And possibly Twitter too.

Let’s bust one myth before we get down to the business of sorting through Google’s impending downfall.

Myth:  "Facebook and Twitter don’t have business models.“

First, both of them generate a ton of revenue (yes, Facebook a lot more than Twitter, but depending upon your definition of "ton,” Twitter brings it home as well).  Second, remember these are private companies and are not (yet) required to publicly divulge financial information nor are they required to publicly divulge their “real” business models.  It’s easy to see how Facebook makes money (whoa look at those ads on the right side of the screen that I never click!) and Twitter’s revenue model is becoming a little more clear (hey look, mom, sponsored Tweets, hmmmm.)  But many argue that those “other revenue sources” remain limited compared to their competitors.  Sound familiar?  It should.  (If it doesn’t, look up.  Ok.  Good.  Let’s move on.)  Just as the pundits criticized Google for not using tried and true methods of revenue generation such as banner ads, many have criticized Facebook and Twitter for not capitalizing on search.  And they’d be right that Facebook and Twitter have not capitalized on search, but I can only think of three reasons why:

1. they’re stupid;

2. they haven’t gotten to it yet; or

3. they have something more lucrative up their sleeves.

I honestly don’t know whether they haven’t gotten to it yet and/or if they have a better (secret) model (though I have my suspicions), but I can assure you that the collective wisdom of Facebook and Twitter management and their investors is “smarter” than the rest of us.  And by smarter I mean better informed and equipped to make judgments about the direction of their businesses.  That eliminates #1.  So is it that they just haven’t gotten to it yet?

Information Relevance is, well, Relevant

Information technology paradigm shifts occur when underlying technology profoundly changes three variables:

1. access to information,

2. velocity of information, and

3. relevance of information.

We’ve moved from mainframe to personal computing.  From personal computing to web-based computing.  (Throw client-server in there somewhere too.)  Now we’re moving from web-based computing to social computing.   And the move from web-based computing to social computing is as or more profound a paradigm shift as any of the previous moves.  Clearly access to and velocity of information have accelerated - show of hands, who heard about the Miracle on the Hudson via Twitter?  Cool.  You may all put your hands down now (that includes you, investigative reporting staff at CNN).  But it’s really all about information relevance and that’s where Google has really excelled.  And it also presents the company’s biggest challenge to date.

How Does Google Work?

Think of the web as a giant network of interconnected nodes (because that’s what it is). Each node is a website and each website points to other websites.  Google determines the relevance of a single piece of information by how many other nodes (websites) on the network point to that piece of information and how “important” each node is (i.e., how heavily should each node’s pointing be weighted using factors like how many other nodes point to that node).  This is PageRank (well, sorta, but close enough). Google looks at the entire web so that when we type “Libya” into a Google search box, we get a list of the websites containing that information listed in order of relevance that is determined by the Internet itself (i.e., all of the nodes on the network).  It may have its flaws, which Google has been quite astute at addressing, but its simple, elegant, and awfully darn effective.

How Can Facebook (or Twitter) “Search” Work?

Think of Facebook as a social network of over 600 million interconnected nodes and Twitter as a social network over 250 million interconnected nodes (because that’s what they are).  Each node is a person and each person points to pieces of information via status updates, shared links, tweets, check-ins, likes, comments, replies, and so on.  Yes, there are tons of irrelevant updates out there about the minutia of someone’s life (“I need coffee…. #weeeeee!”), but (1) there were and are tons of seemingly useless websites out there as well (depending upon how critically important you consider a squirrel’s ability to water ski) and (2) there is an enormous amount of useful information (e.g., links to news, product reviews, location check-ins, television updates, etc.) in the more than 100 million Facebook status updates and tweets per day.  Read that last part again.  These are content and relevancy meters created PER DAY.

When we think of social search, we often think of searching through our connections’ updates for information.  Even when we discuss practical applications of this type of search (e.g., for a restaurant recommendation), nonbelievers cry, “But I don’t care what my friends think.”  Both of these takes on social search completely miss the point. Instead, lets use the Google analogy.  Think of a piece of information sitting on its own with millions of nodes (i.e., websites) pointing to it so that we can use Google to find that piece of information and determine where it should lie in the list of relevant pieces of information returned in a Google search.  Ok, now lets look at that piece of information through a social lens.  Think of that piece of information sitting on its own with millions of nodes (i.e., people) pointing to it via status updates/etc.  By investigating how many nodes (people) are pointing to that piece of information, we can then see how that piece of information relates to the entire network (i.e., not just “friends.”)  We can then determine the weight of each node (person) using a variety of factors including degrees of separation from the searcher, overlapping friends, overlapping likes, overlapping check-ins, and so on.  Holy moly…. we’ve got a very powerful relevance algorithm.  Now we can look at all of the information in the world and how it relates to all of the people in the world (ok, about a tenth of the population of the planet today, but that’s still an ample sample size).  And it’ll only improve with time as more and more people join and contribute to the social networks.

But wait, there’s more….  If you and I search for a specific term on Google, all else being equal (time, place, etc.) we’ll almost surely get a list of the same websites.  When we look through a social lens, however, we can get very different results that are tailored to us based on not only our IP address and deep demographics, but also based on how we are connected to the rest of the world.  That is, search via Facebook or Twitter can be dynamic.

Oh, and one more thing.  Facebook and Twitter own all of the content generated on their social networks; i.e., they own the status updates/etc. that point to all of this information.  Google doesn’t own the data.  For what it’s worth.  (Who wants the over/under on the Facebook and Twitter antitrust lawsuits beginning within the next several years?)

That’s All Nice, But Why is Google F****d?

Google makes money primarily via paid search and right rail and other ads places on websites using Adsense.  Let’s take these in reverse order.

There is not or at least should not be a web app in the world created today that does not allow a user to register via Facebook.  It’s easier, faster, and more secure for the user and gives the app an enormous amount of information about the user so that it can provide a better and more personalized experience, which should result in more lucrative revenue opportunities for the app developer.  This is why tens of thousands of web apps (and way over 60 million people monthly) use Facebook Connect - and this trend will only grow stronger.  (We could make a similar argument for connecting via Twitter.)  Any web app developer using Facebook Connect could theoretically expose way more targeted advertising to its users than they could via Google Adsense.  That equals higher CPMs, which equals more revenue for the publisher (and for Facebook).  So why haven’t they done this yet?  Same answer:  Facebook is either stupid (not), hasn’t gotten to it yet (very possible), or… has a more lucrative way to leverage this (ooooh).

That brings us to back to search.  People began spending more time on Facebook than any other site two years ago and last year Facebook overtook Google as the most visited website in the world.  So the potential to drive users to its own search functionality is quite good for Facebook.  But if Facebook also can give users the ability to search the (now social) web through a social lens as described above and return better (i.e., more relevant) results, then Google has a monumental problem.  It doesn’t hurt that Facebook made out with Microsoft for a little bit and banged out a Bing deal. Remember, Google wasn’t first - not even close.  But Google did search better than Yahoo, Excite, Lycos, Infoseek, and the others so it won.  Facebook has the potential to do search better than Google and, therefore, has the potential to unseat the king. Remember, every company gets f****d eventually.

So What Should Google Do?

We’ve come a long way haven’t we, Jeff Jarvis?  I can think of three responses, none of which may save Google from its ultimate demise (demise meaning relegated to being a multibillion dollar technology powerhouse):

1. build;

2. partner; or

3. buy.

Google tried to build a social network.  Twice so far, actually, by my count (Orkut, Wave) - and certainly there are more attempts to come.  But Google just isn’t beating Facebook or Twitter at their own game any time soon.  Google’s social partnering is already underway; e.g., its investment in Zynga, adding Facebook likes to search, and buying access to the Twitter firehouse.  But each of these partnerships leaves Google beholden to its partner for a desperate toehold in the social web.  That leaves the acquisition route.  Facebook is out of reach, so Google must buy Twitter.  And Google should pay $1.5 billion for every 1% potential market share loss to Facebook (~1% of Google’s ~$150 billion enterprise value). That number gets pretty high pretty fast, but so does Google’s potential for irrelevance in the new social web world. Twitter is an open platform (contrary to Facebook) for creating, delivering, and determining the relevance of information, and Twitter has a misunderstood and underappreciated powerful model for generating advertising supported revenue.  Would you guys just do it already? (Full disclosure:  I own a shtickle of Twitter through a private secondary market transaction.  I also own a handful of illiquid bulletin board and pink sheet stocks - Larry, call me.)

(*)Why Google isn’t F****d.

Ok ok ok.  Google isn’t totally f****d.  The company has a market value of $150-200 billion, has around $35 billion in cash, generates approximately $30 billion and $10 billion in annual revenue and profits, has 65% search market share, and employs among the finest engineers in the world.  Google isn’t going away any more than Microsoft or IBM went off and died.  To put it in perspective, after Microsoft’s and IBM’s respective “deaths,” the two maintain market valuations of around $200 billion and each generate somewhere in the vicinity of $20 billion in annual profits.  But make room for some new leaders.  It’s about that time.

(PS - I fact checked this piece using Google, but I’m posting it on Tumblr and sharing it on Facebook and Twitter.  Shalom.)