Entrepreneur Watch

Can Microsoft stop the Google Monopoly?

At the "D4 - All Things Digital" conference, Microsoft CEO Bill Gates was put on the spot by Walt Mossberg and had to defend the company's lackluster results in the search business. Give us time, he declared. It's a message that resonates with Microsoft watchers, who have seen the company come from behind time and again. Marketwatch gives a summary of his talk.

More disturbing is Gates's claim that "Google has done less innovation than I would have expected a year ago." That's what killed off most of Microsoft's competitors in the past. They gave Microsoft the chance to catch up. And Google sometimes seems as though it's more interested in creating new products than improving old ones. I still find that Google Desktop has a tendency to miss documents I'm searching for, although the product is still better than Microsoft's. That could be trouble for Google.

Still, Gates could be raising those arguments simply because he knows they resonate with crowds. Microsoft insiders have told me that Gates seems much less involved with his company these days, preferring to spend time with his charitable foundation. He is middle-aged now. As impressive as Steve Ballmer and Ray Ozzie are, Gates has always been  Microsoft's biggest asset. Asked about his title of "chief software architect" at D4, Gates responded, "My title is a strange thing. People should think of me as chairman." Well, that title wasn't so strange when he took it. If true, Gates's lessened role could be the biggest threat to Microsoft's future, although I'm sure he would consider that idea random.

But Microsoft is still the biggest threat to Google. As Gates says, the company is patient. It has been written off too frequently in the past.

Still, a monopoly in search is no big deal. Let's face it, that's a $0 billion business. The real issue is where the money lies--in advertising. Google is rapidly becoming a monopoly in that business, enjoying a huge Network Effect that nobody has yet figured out how to combat. Its ad revenues are growing faster than online advertising overall, the fastest-growing form of advertising in the world, increasing 38% from 1Q 2005 to 1Q 2006, when it reached $3.9 billion.

But Google's ad revenues grew even faster. In 1Q 2005, Google accounted for 45% of all online ad revenues, and in 1Q 2006 that rose to 58%. Ballmer is well aware of that fact, and in a recent speech in Silicon Valley, warned against Google's potential monopoly there. "If there's only one advertising marketplace in the world, there's going to be lots of unhappy people," he said.

I can't wait until Microsoft starts complaining to the Justice Dept. about Google's advertising monopoly.

Yahoo + eBay vs. Google

All the speculation about a big Web site merger or partnership has finally been confirmed with the announcement of an alliance between eBay and Yahoo. Forbes.com has a good summary of the implications of the deal, correctly stating that it was inspired by a mutual desire to take on Google, which is invading the turf of both companies.

It's a good deal for Ebay and a risky one for Yahoo.

I'm always skeptical when two companies losing market share try to build it back up with an alliance or merger. Why executives think that combining two companies in trouble means new strength is beyond me. It's usually a sign of desperation and rarely works (remember all the alliances companies formed to defeat Microsoft?)

Alliances between two companies losing market share more often than not drag each other down. Their interests are not always mutual. Most people once thought the merger between AOL and Time Warner was a great idea, too.

Forbes says "Ebay gets access to China, via Yahoo!'s stake in Alibaba.com, while Yahoo! can piggyback on eBay's success in Europe." But the market shares of these companies are not necessarily additive. Ebay customers are not doing the same things as Yahoo customers.

Ebay may benefit because Alibaba owns Taobao.com, which beats eBay handily in Chinese market share of consumer to consumer sales (57% vs. 34%). Combining the two into one big auction site would be an enormous benefit, but nobody has said that's in the works. Alibaba is an independent company.

Will eBay help improve Yahoo's presence in Europe? The collaboration calls for Yahoo's presence on eBay's toolbar, which may not really drive traffic to Yahoo Search except using it to search through eBay. Will people buying and selling stuff really use Yahoo to search the rest of the internet? Only if both search engines have equal appeal, which is not the case.

Yahoo will benefit from the use of PayPal if it gets a discount from eBay. But that also creates strong incentive to create an alternative to PayPal. It's never a good idea when a customer of a service (eBay) buys what was supposed to be a service to everyone (PayPal). I've always felt that merger probably stalled PayPal's growth, and this deal could slow it further.

Yahoo also gets exclusive rights to provide "graphic ads" on eBay. EBay had better tread carefully in ad deals with Yahoo, because ads that eBay buys through Google drives a lot of traffic to eBay. And I assume this means that Google can still provide non-graphic ads on eBay, still the most lucrative type. Too many graphic ads could damage eBay, because the site becomes even more annoying to navigate.

The best scenario for the pair would be a partnership that focuses on their strengths, not their weaknesses. Yahoo should focus on becoming a community site, where it is strong, not a search engine, where it is weak. EBay could add to that community, and perhaps drive traffic to Yahoo's other offerings.

It's logical to anticipate that this alliance could eventually lead to a merger, with the focus shifting to community services, not search. We'll see.

The danger of Google's censorship

Google seems to be getting increasing criticism for censorship. Much of it is unwarranted. The biggest complaint is over Google caving in to Chinese censorship (along with Yahoo and other search engines.)

But Google is actually trying its best to serve China's needs appropriately. Google has been producing a Chinese language search engine without censorship for yers, but it got little traffic. It was censored by the Great Firewall of China, and was slowed down enormously by the Chinese filtering. Google, by the way, still runs the site remotely from Chinese soil, so Chinese surfers can still access it. But it has now added an official Chinese version as well, based in China. Google employees are now in China building it, in order to improve Chinese access to the internet in general.

As long as Google is on Chinese soil, it has to obey Chinese Law (just as it obeys German laws against calling up neo-nazi sites, and eBay has to conform to laws against selling Nazi memorabilia.) And Google has decided not to offer email or social networking in China, in order to avoid the need to turn over the identities of users who make anti-government statements, as Yahoo has had to do.

I had lunch with Google CEO Eric Schmidt during the company's annual meeting recently, and he succinctly stated the problem with China.

"If we don't obey Chinese law, our employees there will be jailed and tortured," says Schmidt. "I have a problem with that."

Now there are reports that Google censors out right-wing sites. In fact, it appears that Google censors sites that promote hate, not members of the Republican party. The biggest sinners Google is censoring appear to be, not news sites, but hate sites and blogs, especially against Islam (a popular target these days.) Slashdot cites a few examples.

Google, I'm sure, believes this is part of its mandate to do no evil--something that other critics think Google does not adhere to enough. Google tries to filter out porn sites and doesn't accept ads from them or other sinful advertisers, like cigarette and alcohol advertisers. But it is being sued for allegedly making money off kiddie porn. Sergey is Jewish, but the company does not censor out Hamas sites that are anti-Israel. He has also been criticized for that.

Contrary to popular opinion, Google News has never been unbiased. Two years ago, in a speech at Stanford, Schmidt told a story about Google News. Someone had asked him what bias Google News had. He told them, "We don't have a bias. It searches the news." But when he got back to HQ, he asked the developer of Google News if it had a bias. The answer was yes. It's biased to bring up more soccer results, because Americans don't pay enough attention to soccer. The developer was a big soccer fan.

Google does censor. But it is in a difficult place. The danger is in the fact that it censors at all. Newsbusters is right; it's a slippery slope. Which is why U.S. laws, cherishing freedom of speech, do not prohibit unpopular ideas--although there are laws aginst hate groups and folks advocating violence. If Google did not cut out such sites, it would be criticized from the other side.

The only way for Google to avoid that slope is to clearly state, on its news site, the topics or attitudes that it refuses to link to. This would not give away important Google secrets. The company has biases, as do we all. If Google is not careful, the calls to regulate it as an essential service and a monopoly will grow.

Google's video ad hypocrisy

Google's video ad announcement is already creating controversy. When will the company learn that it has to get out there and really explain itself over new announcements in order to address the complaints?

Overall, it's a good and an inevitable idea. Back in 2000, while at Upside magazine, I had proposed almost precisely the same idea (without the targeting, since we didn't have the technology to do that.) People hated ads then, and refused to click on them because they would take you from the site to some sleazy and irrelevant advertiser.

My idea was to have a static box that would play a video ad when clicked on, without taking you off the site. I hoped that would encourage clicks, in order to get brand awareness. The ads would have to offer you something enticing in order to get people to click, such as a discounted price if you watched the video (you could get a bar code at the end of the ad.)

I even went in search of a Web video business that would create such an ad, so that I could demonstrate how it works in a column I would write about the idea. Then Upside went bust.

John Battelle wrote a good essay about how video ads could work with the internet and television in the future.

To those of you who think this won't work, sorry, but you're wrong. It will be most useful for accompanying sites with other video content. Eventually, tons of video, including television programs, will be available on the internet. How do you make money from free internet TV? The ads have to be interesting, targeted, optional, and must offer some reason to watch them.

Google will show Hollywood how to do video ads properly. Hollywood executives have publicly pleaded with viewers not to skip ads, threatening that it will end the days of free television. Philips is working on a DVR that will not allow you to fast forward or change stations when a commercial is playing. How stupid can the industry be?

But I have one big complaint about Google's program. Why can't sites that accept ads opt out if they want? Mitch Ratcliffe at ZDNet has a good opinion piece pointing out the hypocrisy of the fact that Google will place these ads on other sites, but not its own. One of the reasons Google became popular is because it has a clean, spare, easy-to-navigate site, and it doesn't seem to want to screw that up with graphics and video ads. What if you don't want graphics or video on your site? This program is a disgrace until Google lets sites opt out.

Google and child pornography

What is the deal with Nassau County Legislator Jeffrey Toback, anyway? He's targeting Google with charges of promoting online child pornography, but no article I have seen specifies exactly how Google is doing that. He claims that google is "knowingly generating billions of dollars from the pornography trade and illicit profiteers, in intentional and reckless disregard of its legal duties and the well-being of our nation's children."

Billions of dollars? Total Google revenues in 2005 was $6.1 billion. so a third or more is from child pornography? And that from a site that refuses to accept ads for beer and tobacco, let alone porn.

This is clear grandstanding for Toback's constituency. Like many fearmongers, he's targeting Google because it's big and successful. It comes with the territory.

The Brazilian government is also targeting Google's Brazilian version of Orkut for allowing child predators to use the site. The government is threatening to shut the site down.

Google is not only big, but it pledges to do no evil, making it a ready target. People overly criticize the company precisely because it makes that claim. That's good. It forces the company to be more careful than any other business I can think of. Except maybe Ben & Jerry's.

But it's Google's own fault for exacerbating the problem. Its PR sucks. It is so obsessed with secrecy it fails to adequately address these issues and defend itself. This is one of the biggest threats to Google's future. Everyone targets the company, and the public begins to question its honesty, a crucial feature of its success.

There are plenty of real issues to criticize Google for. Let's skip the child pron stuff and and tackle some of the real issues. What's your favorite? And let's force Google to open up and defend itself more.