Internet Outsider

Map Wars: Google and Microsoft Tussle Over Coolest Map Apps

At the Where 2.0 conference in San Jose--which, like every other web-related conference these days, is jammed.  "Geospatial" content and tool companies have developed into their own micro-economy, and Where is the center of it.

The big fight, here as elsewhere, is between Google and Microsoft, over who can produce the coolest 2D and 3D global mapping platforms.  The startling news is that, in this arena, Microsoft appears to be holding its own.  Google's new "block view" feature is cool (put yourself on map, look at buildings around you, walk down street, etc.), but Microsoft's new "Virtual Earth" project is even cooler.  The latter is powered by high-res photos taken from low-flying planes, and the reported $150 million the company is spending on geospatial content is paying off (at least in the "wow" department). 

As with many of the companies here, Google Earth and "Virtual Earth" appear to be cooler than they are commercial, at least for now.  The most obvious source of revenue on the consumer side of the geospatial business would seem to be local advertising and logo/placement, but if this opportunity is producing meaningful numbers, no one is discussing them.  The CEO of Platial, for example, Di-Ann Eisnor, raved about how much money there was to be made in made in mash-ups, but offered exactly zero details.  The same went for a company that provides "soundscapes" (click on a place, listen to what it sounds like) and Garmin, which has some cool "make your own trail maps with your GPS device" technology that mountain-bikers and joggers are reportedly bananas about. Garmin's model is obvious--sell units--but the gravy train that will eventually have to support the rest of this exploding industry is still unclear.

Google Swallows DoubleClick for a Mere $3B

What's $3.1 billion between friends?  Or, put differently, what's it worth to fix your display-advertising problem, corner the market for the "advertising operating system," and deliver a hammer-blow to an already prostrate Seattle-based competitor?  $3.1 billion?  Sure.  Only a few quarters of free cash flow.

So now Google controls a vast share of the market for graphical online advertising, too.  And has yet another display on its world-domination dashboard about who's doing what where.  For those with an eye on the really-long term, it's hard to see how this isn't good news.

For those with an eye on the near-term stock price, meanwhile, it's probably bad news: Lower margins, a big management challenge, a significant price tag, an admission on the largest scale to date that it sometimes makes sense to buy instead of build (no shame in that--just lower returns on capital), and so on.  But as Google made abundantly clear in its IPO prospectus, management (sensibly) isn't focused on the short term.

One Way for Microsoft to Kill Google

Okay, not kill Google, and, really, barely even scratch it, but at least a way to make publishers happy and claw back some market share.

As Douglas McIntyre points out on www.24Wallst.com, one flaw (for publishers) in Google's advertising programs is that publishers receive no compensation for displaying ads that aren't clicked on--even when those ads are towering skyscrapers that have immediate (and unavoidable) branding impact.  The advertiser is certainly gaining something from such ads (brand exposure, reach), and Google is certainly gaining something (power), but the publisher ain't getting jack.

So it's time one of the big ad networks started compensating publishers on a CPM basis in addition to a CPC basis.  The per-view payment obviously shouldn't be as much as a per-click payment, but it should be something.  Newspapers, after all, get paid huge bucks for running un-clickable ads, many of which are never even viewed (because the whole section is tossed in the trash). 

This is where Microsoft has an opportunity.  Inasmuch as it is already trying to build a branding campaign around its benefits to publishers ("Google wants to steal your stuff; we want to help"), it should create a CPM based network and start paying publishers for delivering eyeballs in addition to clicks.

Prediction: Google to Buy Spot Runner

Spot Runner CEO Nick Grouf presented today at OMMA Hollywood.  Spot Runner provides a simple, quick way for local businesses and national corporations with local offices to create, buy, and place highly targeted local TV advertising.  If Google's M&A team is not already driving down to LA with truckloads of money to buy the company, they should.  And if they don't, Microsoft or Yahoo should.

Accordingt to Nick, Spot Runner reduces the cost of creating a decent TV ad from $500,000 to $500 ($499 to be precise).  It reduces the time necessary to plan and buy a TV campaign from 6 weeks-12 months to 24 hours.  It allows thousands of local businesses and franchises that would never have been able to employ TV advertising in the old media world to do so--and target the campaigns by zip code. 

UPDATE

Two readers argue (see comments) that what Spot Runner is offering is nothing new--that cheap creative has been available since the Dark Ages, that you can target by zip code, etc.  The impression I got from the presentation was that Spot Runner seriously streamlined the process (and reduced costs).  Any Spot Runner customers out there care to weigh in?

UPDATE 2

One reasonably happy Spot Runner customer weighs in (see comments).  Any others out there?

Microsoft Sharpens Knives, Points At Google Books

After a government-and-monopoly-inspired period in which Microsoft had to pretend to be a gentle force for global good, the company is being forced to return to its ruthless roots.  Ironically, it is doing this in part by decrying the unfair practices of a competitor and shamelessly sucking up to the Establishment.

Today's speech by Thomas Rubin, Microsoft's associate general counsel, to the Association of American Publishers is entitled "Searching for Principles: Online Services and Intellectual Property."  Based on what the speech says, however, it might as well have been titled: "How Google Intends to Put You Out of Business, and How Microsoft Can Help." 

To those who watched Microsoft work its competition-annihilating magic in the 1990s, the speech is amusing in its role-reversal.  Unless the company really has had a DNA transplant--which, after a decade of anti-competitive regulatory attack, it may have--Microsoft doesn't give a damn about the Association of American Publishers (or, for that matter, any other established business or "fair use" practice).  What Microsoft cares about is Microsoft, and now that Google has officially added "crush Office" to the corporate "To Do" list, Microsoft no longer needs to hold back.

As to the speech's assertions...Is Google really taking an unfair attitude toward copyright?  In some ways, yes.  Should this attitude wake up the Establishment?  One hopes so.  But one also hopes that the publishing Establishment, at least, will handle the situation in a more forward-looking manner than, say, the music industry dealt with Napster, et al. 

Google Books could end up being the best marketing tool the publishing industry (or, at least, authors) have ever had.  Once a book is indexed, readers and researchers who would otherwise never even have heard of it might effortlessly discover that it contains exactly what they are looking for.   

The real value in a book, moreover--to the only two parties that really matter (author and reader)--does not lie in wood pulp and ink but in words and ideas.  In the old days, publishers helped produce both.  In recent years, however, many publishers have essentially become book packagers, whose core expertise and service lies in producing and marketing attractive-looking wood pulp. 

So if the end result of Google Books is to radically change the traditional publishing business, this may serve writers and readers (and, yes, Google) just fine.  As long as a reasonable revenue-sharing model can be developed, writers will keep writing, editors will keep editing, printers will keep printing (for those who want paper), and readers will keep reading.  The only casualty will be the traditional publishing industry--and, perhaps, Microsoft. 

Google Paints Bullseye on Microsoft; I Eat Crow

It has been obvious for some time that my theory of a year ago--that Google and Microsoft weren't really going to go to war with each other (because Microsoft had already lost the web game and because Google wasn't going to be stupid enough to take aim at Microsoft's crown jewels)--was wrong.  I was right about the first part--Microsoft is still nowhere on the web--but wrong about the second: Google clearly has its sights set on that pot of Office gold.

So, what is the current status of the office productivity battle?  And what are the long-term implications?  The current status is that Google's offerings are fine for low-end use but won't start meaningfully cannibalizing Microsoft's sales for years.  No self-respecting IT manager at a Fortune 500 company is suddenly going to throw out the global standard and bet his or her job on the sideline business of an Internet media company.  Over the years, a parade of web and technology titans--AOL, Oracle, Sun, Yahoo--have tried to upend parts of the Redmond monopoly, and all have found the crossover from their core business to PC software far harder than it looked.  And if Google is serious about stealing some of Microsoft's sales and support customers, it will undoubtedly find this transition hard, too.

On the other hand, Google's current offerings--Gmail, Docs & Spreadsheets, etc.--bear all the markings of a classic disruptive technology.  As Harvard professor Clayton Christensen observed, disruption begins when a dominant market leader has built so so much functionality into its core products that it has begun to over-serve its core customers.  Some of these customers, realizing that a simpler, cheaper product will do, abandon the old technology.  At first, this does not concern the incumbent, as it maintains a chokehold on the highest margin business--the high-end customers who need most of that complicated functionality and support.  But, gradually, as the lower end product gets better, and the incumbent is forced to migrate to even more complex and expensive solutions, more of the overall customer base defects.  And, then, voila, one day the incumbent wakes up and discovers that it is DEC, Sears, or AOL...and by then it's far too late to do anything about it.

From a long-term perspective, Google's initial offerings look mighty disruptive.  And although Microsoft will no doubt assert until it's blue in the face that it has long since gotten Google religion and is already adapting all of its products for web-based delivery, it will likely find this easier to say than do--if only because each new free or low-priced subscription seat of a web-based Office won't immediately drop a couple of hundred dollars to the bottom line.

At the same time, by targeting Microsoft's crown jewels, Google is risking not only failure but its own monopolistic dominance of its core business--search.  Selling and servicing technology solutions is a fundamentally different business than selling and providing advertising solutions, and will eventually require the creation of an entirely new sales and service organization.  No company in history has dominated the hearts and minds of both marketers and IT buyers, although several have tried.  Even with Google's awesome talents and power, therefore, success is far from guaranteed.  Especially because the opponent in question, a sleeping giant that has so thoroughly dominated its industry that not one but two governments were forced to try to stop it, won't likely give up without a fight.

Google Spreadsheet and Google's Microsoft Obsession

Let me first eat some crow about arguing last year that Google and Microsoft were not going to go to war with each other because, except for the MSN crossover, they were in different businesses.  They are in different businesses, and I still think it would be a disaster for Google to compete directly with Microsoft Office by ginning up a Google version of OpenOffice.  But as the Writely word-processing acquisition and, now, Google Spreadsheet, make clear, Google wants the casual Microsoft Office user.

A few thoughts:

First, if Google's long-term ambition is to bring Microsoft down, this is, in fact, the way to do it.  Google Spreadsheet and Google Word, as described, resemble classic disruptive technologies: cheaper, more convenient, no-frills solutions aimed at products with fat product margins whose complexity and usefulness have overshot the mainstream.  History suggests that, if such products take hold, Microsoft will have an extremely difficult time competing.  The company will be driven to the high end of the market, and, ultimately, displaced----following in the footsteps of most of the doomed incumbents in The Innovator's Dilemma. Importantly, the problem will not be technology: Microsoft is obviously capable of releasing its own web-based spreadsheet.  Rather, the problem will be conflict with the existing business and profit model.  All this, however, depends on Google Spreadsheet, et al, capturing the low-end user and then gradually moving up the value curve.

Second, although it is easy to extrapolate from "Google Spreadsheet" to "Google Takes Over the World!", I do not think it is a given that the product will be a hit, especially initially.  Few professional Excel users are going to use a stripped-down, web-based alternative, so the core Office market is safe for now.  Furthermore, free or nearly free spreadsheets have been available for years, and they haven't made so much as a dent in Microsoft's monopoly.  So it would be easy to overestimate Google Spreadsheet's impact, especially initially.

Third, what is the business model?  To seriously compete with Excel, and to avoid the fate that has befallen many of its "WOW!" product introductions, Google will ultimately have to dedicate a big team to the spreadsheet and word-processing services.  At some point, that team will start costing real money, and no serious spreadsheet and word-processing user I know of is ever going to stop working on documents to click nearby ads (The "PPC ads in apps" concept is absurd).  If the goal is simply a portal strategy--soak up more of a user's computer time, and you'll capture a greater percentage of their searches--then, fine.  But the ROI on a free spreadsheet designed to capture more of a user's time is way lower than that of a successful tweak to a search algorithm.  Google's overall ROI, therefore, should continue to fall.

Bottom line, I am still not convinced that office-productivity tools a la Word and Spreadsheet are Google's best route to revenue diversification.  They offer usage diversification, certainly, but, so far, no revenue diversification.  I continue to worry that Google resembles Yahoo! in 1999--a mile wide and an inch deep--and until a few other products emerge as category killers, I will continue to worry about this.  To be fair to Google, of course, it bears noting that the company developed its search service for years with no revenue model, and that story certainly had a happy ending. 

 

Microsoft to Buy eBay? Bold... But Futile

The NY Post reports that Microsoft and eBay have been having merger discussions, and that, ironically, the talks have cooled of late because lawyers are concerned about anti-trust issues.  Suffice it to say that if such a deal were blocked because of monopoly concerns, regulators would merely be demonstrating an astounding inability to grasp current market dynamics.

But more to the point--Is an eBay-MSN merger a good idea?  In a word, no.  It's a bold idea, certainly, one that illustrates Microsoft's seriousness about making MSN more than an also-ran.   But eBay doesn't need a portal draped on top of it, especially the third-ranked portal, and owning eBay won't save MSN.  The entity would have a fighting chance as a stand-alone company, but Microsoft seems determined to keep strangling its Internet division by keeping all its businesses all under the same roof.  As a result, post-merger, eBay's talent would rapidly depart for greener and less-humongous pastures.  And as Microsoft struggled to integrate, staff, and manage a huge new business it knows nothing about, Google and Amazon would get a dream opportunity to chip away at the eBay seller base.

The most complementary assets Microsoft would gain in such a merger would be PayPal and Skype.  Alas, unless the company intends to spin-off eBay's marketplace business, this seems an awfully expensive way to get them.

Concept Grades:

Boldness, Vision, Ambition, etc.: A-

Chance of Practical Success: C-

Ballmer Gets Checkbook, Vows Billions for MSN

Per the WSJ, Steve Ballmer announced that Microsoft will radically increase spending on its online business to keep pace with Google and Yahoo:

[Ballmer] said the spending would include $1.1 billion in 2007 on its MSN online business, compared with $500 million in 2005. "We will invest as much on this online opportunity as any of the other bigger players in the market," Mr. Ballmer told about 700 advertising executives [at a big shindig in Seattle].  A report from Reuters adds that the aforementioned $1.1 billion will be for R&D spending and that the company will up MSN's CAPEX from $100 million to $500 million.

Well, good, then we don't have to write off Microsoft in the online business just yet.  Alas, if Steve thinks keeping pace with Google is only going to cost this much, he's a tad out of date.  Google will likely spend CAPEX of $1.5-$1.7 billion this year, versus Steve's $500 million, to say nothing of next year.  As for R&D, meanwhile, Google exited Q1 on a run-rate of $1 billion, up more than 100% year-over-year.  Google's R&D spending for Q306-Q307, therefore, will probably be closer to $2 billion.  Microsoft's newfound commitment--which will probabably generate significant divisional losses--might allow it to keep pace with Yahoo's spending, but Google's should still leave it in the dust.

The WSJ adds that Ballmer said Microsoft was "impatient and determined" to play a bigger role in the online advertising market.  Again, good.  The only chance Microsoft has is if it is humiliated and pissed off.  Even then, I think the chance of real success is small, but absent this passion, it would be zero.

[Updated after original post to add data from Reuters.]

So, How's adCenter?

As the WSJ describes, Microsoft's adCenter debuts this week, when it is opened to all advertisers instead of just the 6,000 in the pilot program.  adCenter is critical to MSN's future and critical to the industry's future, as it will determine whether the search industry will continue to be a duopoly or will move to a more normal structure dominated by a "big three." 

Advertisers want the service to succeed, so they will have options other than Google.  Microsoft needs the service to succeed, or any remaining chance it has to gain ground in the search business will be lost.  And whether or not the service succeeds is a critical question for Google, Yahoo, and both companies' shareholders. 

If it is true that Google generates 50% more revenue per query than Yahoo! (and more than 50% more than Microsoft), and if it is true that a major reason for this is Google's ad-selection algorithms, then a successful adCenter could have a meaningful impact on not only industry revenue share but Google and Yahoo's growth rates. 

Revenue to the search engines equates to spending by advertisers, so every dollar spent on Yahoo and Microsoft is a dollar that won't be spent on Google.  Microsoft generates less than 1/5th the search revenue of Google (probably much less).  Still, if adCenter can boost Microsoft's efficiency by, say, 100%, a circa-$1 billion business could become a circa $2 billion business, which would mean that Google's $7 billion business would grow $1 billion less than it might have otherwise.  Bottom line, even if Microsoft keeps sweeping out the cellar in the search wars, it can still play spoiler to the big dogs.

So, the key question is, how's adCenter?  The word one user I spoke with two weeks ago used was "chaos."  Anyone else have any impressions/experiences?

UPDATE:

IO Reader Victor aggressively challenges my logic above that search spending is a zero-sum game (see his comment).  His argument is that, as long as the ROI is there, advertisers will buy as much search as they can, so Microsoft can grow it's own revenue without affecting Google's growth trajectory.  I am not sure I agree that advertisers view search as a "cost of revenue" expense rather than a marketing expense, but I do think Victor has a point (to a point). 

If the ROI on Microsoft is much better than on Google (which is certainly possible in the early days of a successful adCenter adoption), I think you will see dollars flow to Microsoft at the expense of Google and Yahoo--i.e., the argument I made above.  As long as the ROI on Microsoft is the same or worse than on Google, and as long as the demand for good quality search inventory still exceeds the supply, Microsoft's growth should not come at Google's expense.