Web X.0

Innovator's Dilemma, the search engine version

Blekko is soon opening its new search engine, and getting some good coverage. Microsoft's Bing is spending hundreds of millions (billions?) trying to dog chase Google in search. Countless companies tried competing in search before - Cuil, Wolfram Alpha, etc. 

It would be fantastic for the internet to have a real #2 player in this space, but unfortunately I'm afraid none of these efforts will be a real contender to Google in the long run, and not because they fall short on product quality. In fact, most of these products (and Bing is the best example) offer a far superior experience to Google's in many ways. 

But search is a strange category to compete in. I think it has a special dynamic to it -- sort of a weird variation on the "Innovator's Dilemma" -- that makes it so tricky to take any meaningful market share from Google...

The Search Innovator's Dilemma

The trouble is that search companies (and reviewers) evaluate new search engines based on what they do well. Bing does travel search great (as well as images, and many other categories), Wolfram does data-intensive search great, Blekko apparently does vertical search great, etc, etc. It's common wisdom to focus on the things you do well, and do them better than anyone else in the world. But what works well for mostly any other category of company in the world is, I think, precisely the achilles heel of all non-Google search engines. 

Because users, subconsciously, place less value on the queries a search engine handles exceptionally well, than they do on queries the search engine doesn't. In other words - a great search result for a travel query on Bing will matter less to users than getting no good results on a query for say "italian vespa collection poster" (compare to Google...)

Google might lose in the areas where its competition shines, but it doesn't matter. Our habits as users don't form there... they form on those multiple-keyword, 1-off, "non-important" queries, and that's where Google absolutely kills its competition. 

Hence the 'Search Innovator's Dilemma'... to win search market share from Google, it hardly matters to one-up Google on quality, or UI, in any specific type of search. The search habits don't form there. Where you'd need to focus is on consistently delivering OK results on all those billions of queries that "don't matter", and that's a task that, it seems, is nearly impossible for a company to take on. 

An alternative Plan B for Microsoft

Yahoo remind me of the famous saying about the Palestinians:

"They never miss an opportunity to miss an opportunity"

After playing a hand of cards they didn't have with Microsoft, they have now essentially committed harkiri by becoming a node within Google's business. Why would any advertiser now bid on Yahoo's platform? I can't find a single reason, and I doubt advertisers will either (not that they had many reasons before...). I agree with Michael Arrington - Yahoo totally screwed this up, and their search business is pretty much dead.

Now everyone seems obsessed with Microsoft's next acquisition target. I'd like to offer Ballmer my 2c on a potential alternative to the $50B acquisitions they're looking to make. It's called the 200% rev-share program.

But first, a little background:
Online advertising is a strange business. While the advertisers are the ones paying for everything, acquiring advertisers is a secondary concern for an ad network. A distant second. The #1 key to making an ad network work is the publisher side. Even though the publishers are being paid, it's much more difficult to win publishers than it is to win paying advertisers. The reason is pretty simple: Ad space is binary, while advertising budgets are not. A publisher has to make a binary decision on who gets to sell certain ad space. Whoever they choose becomes the de-facto exclusive "owner" of that ad space. Publishers cannot take risks on that kind of exclusive deal, and therefore they all choose the leader who has proven to monetize best - Google in the case of text/search ads.

Advertisers, even though they are the ones paying the bills, are much easier to obtain because their choice on how to distribute their budget is not binary by nature. They can put some money on Google, some on MSN, some on Quigo, etc. Advertisers will generally follow the distribution. He who has publisher real estate will eventually get the advertisers. The other direction is far from guaranteed (see Miva, LookSmart, etc, etc).

A much better plan B for spending those $50B is by seriously upping the rev-share paid out to publishers. And I'm not talking about upping it from 60/40 (about what Google pays out), to 70/30. My suggestion would be to go for a 200 / -100 rev-share with publishers. Take those $50B and use them subsidize the publisher earn-outs for the next couple of years. 

Publishers are dying to have an alternative to Google for monetization. The trouble is that no one has been able to naturally monetize better than Google. And that gap is widening by the minute. This game cannot be won in a dog chase.

The only way to get back into the game is by locking publisher distribution, and the only way to do that is by out-paying Google, even if that means doing it artificially via subsidizing the rev-share and not though higher yield.

Microsoft should offer a 200% rev-share to all publishers (and search sites, etc) for next couple of years until every publisher in the world is talking about how much better monetization is with MSN than it is with Google. When that happens, critical mass of distribution will occur, attracting massive advertising $$'s, allowing Microsoft to *slowly* throttle down the revenue split to under the 100% mark.

This isn't too crazy... If anything, I'd go for a 300% or 400% rev-share and completely nail this down. Google can obviously react to this and raise rev-share splits as well. But for Google this is the *only* revenue source and it would be awfully painful to turn that into a money loser. Microsot can still afford to do this while Windows and Office are still the cash cows that they are. In addition, some of these publisher subsidies will be offset by the improved monetization of MSN's own properties.

This is one of those unique moments where it can really be said that it's now or never.

The chess game continues...

So it looks like the predicted Microsoft-Yahoo deal will happen finally. This is waaaaay overdue - it should have happened back when MSN decided to leave Overture and pursue its own performance-based ad platform. The day that happened (sometime in 2003 as far as I remember) created 2 losing platforms.

I love the timing of this announcement. Looks like Microsoft were sitting on this waiting for Google's stock to dissapoint, and then hand it a beautifully timed 1-2 blow. Cool.
(on a side note - it's really great to see Google's stock crash from $750 to $525 within 3 months... healthy reminder that Google does not have exclusive rights to the world's wisdom and shareholder value)

Seems like the next natural move will be for Time-Warner to spin off AOL (disclosure: I co-founded Quigo which is now part of AOL), and sell it to Google (~$25B?...). The game is advertising, and the key is distribution. There are more ad $'s flowing to the internet every day, and not enough high quality distribution to meet that demand. With Yahoo out of the game, AOL will now be the #1 biggest player with available ad inventory (both on its own properties as well as on its huge platform-A). In a 2-player race, Google will not be able to afford losing AOL to the MS/Yahoo combo and will have to make this move (not to mention that it already owns ~5% of the company). Interesting days...

Microsoft finally understands - dog chasing is dead

With today's news re Microsoft looking to acquire Yahoo, it seems like they finally get it -
The performance-based advertising world is like no other space that Microsoft has ever played in before.

In spreadsheets, browsers, servers, databases, etc, etc - the Microsoftian way of doing business works like a charm. In all those categories, dog chasing proved to be a great way for Microsoft to win the market because it could out-price and out-patient its competition. Oh - and tying products into the OS monopoly didn't hurt too much either... ;-)

With performance-based advertising[1], dog chasing ceased to be an option. You can't undercut competition, because competition ain't pricing their product (it's the customers/advertisers who do, and they price it upwards, not downwards). You can't out-patient your competition because performance-based advertising has this wonderful virtuous cycle about it:

• The more clicks you have, the smarter your yield-optimization algorithms get...
• ...as the algorithms grow smarter, you can better predict your revenue per page...
• ...as your revenue-prediction power grows, you can better price new distribution deals with the confidence of not losing money...
• ...the better you can price deals, the more distribution you get...
• ...and the more distribution you get, the more clicks (and $$'s...) you have.

This virtuous cycle means that with every *second* that Microsoft was spending figuring out its world-domination dog-chase plan, Google (and others, Quigo included) were opening the gap making it even closer to impossible for Microsoft to become a real player in this space. And every purchase of a DoubleClick, RightMedia, etc just moved way more click data out of Microsoft's hands, opening the gap even more. Chasing a dog that's only gaining momentum faster than you, well - that's not a great chase to be in... 

I've had many conversations with good friends over at Microsoft over the past couple of years. And while the notion was that "we changed", "there's no more NIH Syndrome", "we're ready to make bold acquisitions needed to win this market", etc, etc - It's clear now that none of that really registered there and the plan all along was to dog-chase Google to victory. Looks like the price for realizing this mistake is going to be pretty big.

A ton more coverage on TechCrunch, Henry Blodget... oh what the heck - and everyone else on the planet.

[1] Disclosure: I'm co-founder of Quigo, a player in this space.

GooglePoint, part 2

Some due housekeeping. Ugh - I was hoping to avoid this post...:

A few months back I predicted that Google would not develop anytime soon a presentation app to compete with PowerPoint.

D'oh! - I was so wrong. Note to self: Never underestimate the Google'rs eagerness to inflict pain on Microsoft (and vice versa...)

"Prediction is very difficult, especially when it's about the future." --Nils Bohr, Nobel laureate in Physics

Thanks for the catch, Barak.

One reason why Hotmail sucks

I used to be a big Hotmail user. Now I use only Gmail. There are probably 100 reasons why Gmail is better, and probably a few in favor of Hotmail too.

But if I had to put my finger on a single reason why Hotmail sucks, it would have to be that damn leaderboard ad on the top of the page (screenshot below).

The traditional 3-pane layout in email apps causes the most precious asset to be the vertical axis. These vertical pixels have to accommodate both the list of emails, and the email itself (not to mention all the regular stuff like menus, logo, etc).

The leaderboard ad kills 90 vertical pixels. On my 1024x768 screen resolution, the vertical viewable browser area (after deducting browser menu bars, Google toolbar, tabs, windows start bar, etc) is 518 pixels. Which means that one stupid ad reduces my precious vertical real estate by nearly 20%. As soon as the Hotmail window loads, it's apparent how annoying this ad is.

I'll bet you that the designer of Hotmail (er - Windows Live) is using Gmail.

Is Microsoft acquiring Facebook?

There's something a little weird about last week's announcement that Microsoft has won the exclusive 3-year deal for managing display and text ads on Facebook. Here's why:

• To the best of my knowledge, Microsoft has no contextual product as of yet, and has never run any text ads on 3rd party content sites on any significant scale. As a result, it's impossible for Microsoft to have any significant advertiser base or ad coverage for content or experience in yield optimization.
• What this means, is that either Facebook or Microsoft are betting the farm on Microsoft's ability to build a successful product, to fill it with advertisers and get bid levels up extremely quickly. This is a pretty big bet[1]. 
• Question is - Who's making the bet? I think it's safe to say that Facebook ain't it. Thanks to Google writing checks to publishers quicker than they can take them, the online ad space is now an absolute seller's market. No reason for Facebook to assume any risk on this deal, let alone with a company that has no real product yet, has no advertisers yet, and has little experience in monetizing 3rd party content pages.
• Which means that if anyone is making a bet here, it must be Microsoft. And that's where things are getting a little suspicious. For what's gotta be a material deal, it's pretty strange that: a) "Facebook and Microsoft executives said they began their talks late last week", and b) that Microsoft, a public company, is not disclosing the terms of the deal.

Multi-hundred-million-dollar deals, especially when Microsoft is the one laying down the money don't normally close within less than a week, and once they are closed, they usually are disclosed.

Which leads me to speculate that maybe neither party has assumed any material risk with this announcement?...

How is that possible? Could the following *speculative* scenario be the answer?:

• Microsoft were in the final stages of acquiring Facebook.
• The MSN executives saw the MySpace-Google announcement, making them cringe in their seats about Google getting all the press and Wall St love again.
• Microsoft, wanting some badly needed PR wins, pushes Facebook to make an announcement about winning an "exclusive deal", noting that within a couple of weeks Facebook will be part of MSN anyway so they have nothing to lose.
• Facebook, eager to close their $1B+ acquisition while they are still in vogue and run to the hills, make nice to Microsoft and agree to a vague announcement.

This could definitely explain the suspicious announcement from last week. But does it make sense for Microsoft to acquire Facebook, which has reportedly declined offers to be acquired for $750M recently? I'll try to look into that in a separate post in a couple of days.

[1] How big of a bet? In normal times, this could be estimated by multiplying reasonable CPM's by traffic numbers. But thanks to Google, these are far from normal times and therefore the best way to estimate the size of the bet is by comparing it to the $900M MySpace deal. Considering that the MySpace-Google deal is almost a 4 year deal, while the Facebook-MS deal is a 3-year deal, we can adjust from $900M to $720M. The next discount can be made for user sizes (~100M for MySpace, ~10M for Facebook), so we can further adjust to $72M.

However, it is widely reported that Facebook users login to the site waaay more than MySpace users do (GigaOm reports that over 2/3rds of Facebook users login *daily*... pretty amazing...). And the Facebook users have credit cards, while most of the MySpacers don't. So how valuable is that traffic for advertisers? Facebook would probably claim that $720M or even more is the magic number. Microsoft would probably shoot for the $72M range. The real number, if there is a real deal here (and that's a big IF), is probably somewhere in the middle, and most probably in the multi-hundred-million-dollar range. 

GooglePoint?

The prevailing wisdom seems to be that Google is out there developing an MS Office killer, and after launching mail, spreadsheet, calendar, database (sort of) and soon-to-be-word processor (following the acquisition of Writely), the next target on Google's cross-hairs must be an alternative to PowerPoint.

Maybe I'm slow to see what everyone else has already figured out. So at the risk of looking foolish I'll predict that Google is NOT going to release a PowerPoint alternative anytime in the near future.

Here's why:

• Google is great at web-based text applications, but has very little experience with graphic apps, which is a totally different ballgame.
• The definition of what an Office suite contains is quite arbitrary. As I posted before, I think Google is more interested in engaging MS engineers on defending their jewel products (instead of having them spend time developing an AdSense killer), and NOT on offering a full alternative to whatever Microsoft happened to define as belonging to the Office suite. If this speculation is correct, I suspect the products will be released in order of lowest-hanging-fruit, rather than in order of what Microsoft's marketing folks happened to package into the Office suite.
• The success of Google's "Office Killer" products can be ranked with almost perfect correlation to the advantages gained by turning them from desktop apps to web apps:
• Gmail is probably the most successful - the ability to access your mail from any web-enabled device and always have it synced is a clear advantage over the desktop app - Outlook Express. On the flip side, very little functionality, if any, is lost by using email online rather than on a desktop[1].
• Calendar - Again - enabling a calendar on the web adds significant advantages (access anywhere/anytime, and sharing of calendars) while losing very little functionality that's in the desktop app (security is the only aspect I can think of).
• Spreadsheet (and in due time - word processing) come next - some advantage is gained by allowing collaboration between people (and again - access), but lots of functionality is lost - graphs, macros, etc (not to mention security). Of course these are not functions used by all users, but it definitely decreases the overall appeal of the app.
• Google Page Creator (Google's "killer" app for Microsoft's FrontPage). Very little value is added by moving this app online because collaboration and access on development of personal websites is hardly useful. Yet lots of the rich editing functionality possible on a desktop application is lost when migrating online, making Page Creator a very lame product compared to FrontPage (which itself isn't something to write home about...)
• And this is where a Google version for PowerPoint would rank - little or no value added by moving the app online, while lots of value lost by doing so.
  

Google has shown multiple times in the past that it will spend huge resources on products it thinks are core to its arsenal (Gmail, Google Maps, etc), and that it will also develop low hanging fruits even if their importance to Google is questionable (Page Creator, Spreadsheets, Co-Op, etc). But I have yet to see a product they released which is both of questionable value AND requires a huge R&D effort. And a PowerPoint killer falls into that category.

Sergey & Larry (& Marissa?) are smart enough to set their own product agenda and therefore the definition of what's included in the MS Office suite is completely meaningless here, IMHO.

[1] Gmail should probably be compared to Hotmail rather than Outlook Express, but for the sake of the MS Office Killer discussion I'm sticking to Outlook Express. In any case, Gmail kicks Hotmail's ass big time both on storage capacity and functionality.

USS Google vs USS Microsoft

In the navy, the 1st rule of engagement with an enemy ship is to try to hit it with multiple missiles coming from multiple directions. Most naval ships can handle one missile shot at them fairly easily using chaff, electronic warfare or even shooting it down with good old shotguns. But throw at that same ship multiple missiles at about the same time, and it'll have its crew running around like chickens without heads trying to figure out which threat to handle first.

With each new product Google announces (latest being Google Spreadsheets), I can't help but think that Google is brilliantly applying naval missile tactics at USS Microsoft.

Microsoft has a long history of easily swatting off single-missile threats as if they were mosquitoes. Ask Netscape, Real Media, Lotus, Novell, etc, etc, etc. Each time such threat surfaced, Microsoft moved massive resources and all of its brightest folks to strike the missile and beat it. 

But Microsoft has no experience in handling multi-missile attacks, which are a completely different ballgame. It's a fairly easy decision to shift your entire crew to attack Netscape, when the cash-generating cows like Windows and Office are safe and cushy and don't need much attention. It's a *completely* different decision to move those same resources onto a new, high-risk and currently-revenue-less adventure (=MSN adCenter) while putting in jeopardy the company's existing assets.

Google Spreadsheets is obviously not core to Google in any way. I can't see how in the world it complements their search, and obviously it won't contribute anything worth mentioning in ad dollars (if they ever integrate ads into it, which I doubt). And being that it's free, I don't think anyone in Google's finance team is assigning anything but losses to this product in the future.

So the only remaining conclusion is that this is just one of a set of missiles[1] aimed at Microsoft, forcing them to spend significant resources on defending their castles rather than attacking Google's (AdWords + AdSense) full force.

I don't envy Microsoft in this scenario....

But then again, as I said in this post in more detail, this may just be the 20% pet project of a few Googlers... ;-)

[1] The next such missile on its way from Mountain View to Redmond is probably a word processor following Google's acquisition of Writely. More to come, I'm sure.

adCenter + Xbox + Massive...

Hats off to Microsoft on this one (the acquisition of Massive Inc., for you lazy clickers). One of MS's smarter moves in the past few years, as it relates to their online/advertising strategy.

In-game advertising is going to be, er, massive. Audiences that have traditionally spent much of their time zapping TV channels are now spending much of that time in online games. And where audiences are, advertisers follow.

The trouble with in-game advertising is what I call the 'hands in the pocket' problem - how many companies have to split each $1 spent by an advertiser?

With in-game advertising (as with mostly any advertising medium that has a technology heavy distribution layer) the reasonable model seems to be the 3 hands-in-the-pocket model:

1. The ad network that handles the advertisers, the auction engine, billing, etc.
2. The technology integrator (such as Massive Inc.), that actually figures out the formats for ads, the technical integration into the games, serving, etc, etc.
3. The game publisher - Electronic Arts (EA), for example.

The trouble is that the 3 hands-in-the-pocket model is not a sustainable one. There is simply one hand too many in the pocket looking for that dollar but finding that only pennies are left. The publisher usually commands the lion's share of the dollar - that's almost a given in the publishing world. With ~30c left for the other two, this model simply breaks.

The 2-hands-in-the-pocket model (ad network + publisher) is a very solid one. See Google's AdSense, DoubleClick, ValueClick, etc for examples of how well this works for both sides involved.

But the real honey pot, the grand prize of online publishing, are the 1-hand-in-the-pocket situations. When the ad network and the technology integrator, and the publisher are all one and the same, each $1 of revenue translates to 100% margin (or - 0% TAC). That is usually 3-4x more profitable than the already great 2-hands-in-the-pocket model. The best example of this is Google AdWords which generates about as much revenue as AdSense does, but contributes 4-5x more to Google's humongous bottom line.

And that's the beauty of the puzzle that MS just put in place this week - By owning the distribution (Xbox)[1], the ad network (adCenter) and the technology integrator (Massive Inc.), Microsoft is throwing itself into the honey pot of in-game advertising. It's a position that Google and Yahoo will have a real difficulty to emulate.

[1] Owning the Xbox hardware platform obviously doesn't mean that MS is the publisher of all games available for it. But that's fine... - the 2-hands-in-the-pocket is a great model to augment the 1-hand-in-the-pocket one. See Google's AdWords (1 H-I-T-P) and AdSense (2 H-I-T-P).