Entrepreneur Watch

Secrets to Google's success: Avoid "lock-in"

A couple years ago, I heard Eric Schmidt say something that really bothered me. He was giving a speech at the Stanford Entrepreneurship conference, advising would-be entrepreneurs on how to create a sustainable company. One piece of advice was to create a "network effect," or a huge network of people using your system in a way that makes the network ever-more valuable as more people join it.

The concept of network effect was conceived by Bob Metcalf.

What bothered me was that this is dangerously close to the idea of locking in your customers. Microsoft is used to locking in customers, a big key to its success. As more people used Windows, applications developers had to write programs for that OS, which made it more useful for end users to stick with that OS. It's called a "virtuous cycle."

The thing is, as it's usually applied, it's not very virtuous. When people become locked in to a product, the company making that product doesn't have to work hard to keep them happy. They can't leave anyway, so the supplier doesn't have the motivation of being paranoid that customers might leave. It made Microsoft a huge company, but it lost touch with its customers. Ease of use was sacrificed to the gods of lock-in.

But I was pleased to talk to someone close to Google recently who says that lock-in is forbidden at the company. The right kind of network effect is that seen at YouTube. It has the most videos, so it's the first place you go to find videos.

The internet smacks the concept of lock-in out of contention. If Google gets lazy with YouTube and others come up with a better system, people will migrate. It's too easy to pack up and more to a new site.

I think Yahoo is still dedicated to the idea of lock-in. It wants its "community" of users to become so dependent on its services that they never leave. Email (whether from Google or Yahoo or Microsoft) has a natural lock-in effect. It's too hard to inform everyone of your new email address.

But Yahoo is trying to create something of a gated community, with original content and other services, the way HBO made the transition from just airing movies made by others to creating its own films and programs.

That's great on the limited medium of television, where there are still only so many channels you can get. But it doesn't work on the internet, with virtually infinite bandwidth.

Google was the first search engine that didn't try to be a portal and lock people in. It happily sends people to other sites, if they have the best content or services.

But I still worry that it will lose this dedication as it offers more and more services of its own. Google used to happily send people to Yahoo Finance before it came out with a competing service. Does it still do so? I just don't know. But I'd like to find out.

Other secrets from Google:

Everything is free

Avoid evil

Secrets to Google's success: Everything is free.

Is Google successful because it built a better mousetrap? Every executive at a search company these days will insist that their technology gives results as good as Google's. And from what I've seen of reviews in the press, that seems to be true.

So what makes Google so popular? There are several tactics that it employs. I've decided to write about some of these rules from time to time.

The first is to make sites free. You know you want it, you just don't want to pay for it. Advertising works, and distributing bits through the netwaves is almost free. So DON'T CHARGE FOR THEM!

At Larry Page's speech at AAAS, he pointed out that when he was doing online research for his speech, he came across sites that charge for their info. He passed on them. "I have plenty of money, but I didn't want to download their data because it takes so long" to sign up, give a credit card number, etc. 

It's surprising how many companies ignore this. The press, whose product is information, so often insists on charging for their info. The Wall Street Journal, which insists its articles are so valuable that people should pay for it, is an example. The result is that the Journal left a gaping hole online for MarketWatch to fill. Then the Journal had to spend a couple billion to buy MarketWatch.

I was hired to help launch an online magazine a couple years ago, but could not aggre with management on techniques. So I quit three months in. One thing the CEO insisted on was charging people for access. The data was supposed to be worth it. But how can you write news stories that are so much better than what the other 59,000 news sites are writing that people won't just bail out and find it for free? And that applies to the Wall Street Journal.

The amazing thing is that no publication in the U.S. makes money from subscriptions except Consumer Reports. Subscriptions don't even cover the cost of paper and postage -- things you do not need online. Advertising keeps print publications afloat. So why not rely on it online as well?

Requiring people to "join" for free is almost as bad. It's a time sinkhole, and you have to worry about passwords. People either use the same password over and over, in which case one breach will give thieves access to all their sites, or people forget what password they used at different sites. DO NOT WASTE PEOPLE'S TIME!

A simple rule. I've noticed that most entrepreneurs these days have learned this rule, but the older companies have not. The action is in visitor traction. Give me a million visitors and I'll find a way to make money from it. Wouldn't you?

Larry Page at AAAS

Larry Page wants scientists and entrepreneurs to get more involved in politics and charitable works.

I decided to drop by his talk at the American Association for the Advancement of Science meeting in San Francisco last weekend to hear what he had to say. His best quote: "I'm not very good at companies and business, but I've been pretty lucky." We could use some of that luck.

But what he does know about business is that, these days, "All economic growth is due to technological progress." And the problem is that most politicians don't know anything about the important issues in technology and science. "You really want to have people in power who are able to understand things." Well, that may be asking a bit much.

He came to the meeting, he says, to "encourage engagement." Most importantly, he wants scientists to "try to change the world." That means not just doing research in their labs, but taking control of and trying to commercialize their technologies. It worked for him.

He also feels that, since American universities are spectacular but K-12 education sucks, universities should take over public education and make it worthwhile. He didn't know exactly how that would be done, though.

He thinks we should stop building roads and create better means of transportation. We should be able to invent better ways to transport people. If we can land airplanes on auto-pilot, why can't we auto-pilot our cars? Why don't we have better people movers?

And how about alternative energy? He Googled up some statistics. In Nevada, the amount of solar energy hitting a square mile of land averages about 800 megawatts, Nuclear reactors that use up several square miles generate a couple gigawatts. Thus, he says, "The amount of energy that hits a nuclear plant is about the same as the amount it produces."

And he says this doesn't have to be cells that directly convert light to electricity. Nuclear plants just use their fuel to heat water, make steam, and power turbines. "I don't think making steam from sunlight is that hard."

And the only problem with wind power is distribution. When the wind is blowing, wind power is competitive with coal. We need to be able to store and distribute it properly to take care of those calm days.

And if you want to get a job that helps do good things for the world, he notes that the Google Foundation has lots of money but not enough people to figure out where to spend it. He keeps trying to get the folks there to hire more people. Just a thought.

Google's influence on presidential elections

An interesting question in the next national election is how Google will affect the outcome.

Donna Bogatin's blog today has an item about Google winning big in the fight for attention between Hillary Clinton and Barak Obama. Do a search on Hillary and you get ads for Barak's campaign as well as for Clinton campaign buttons. So Google stands to win big advertising dollars in political campaigns.

The more interesting point is that voters win big. As the internet, and by default, Google, increasingly plays a role in supplying information about elections, we are slowly weaning ourselves from idiotic TV ads with little substance -- at least among tech-savvy people who want real information.

When I tried a search on Sen. Clinton, I also got an ad for Declare Yourself, a "national nonpartisan, nonprofit campaign initiated in 2004 to energize and empower a new movement of young voters to participate in the 2004 presidential election." Very cool.

The search results themselves bring up her home page, her government site (including a constituent email forum),  campaign sites and a collection of articles in the New York Times.

I made a plea in a previous post for Google to create a special search category for election information. I think it's still a good idea.

Back when I was still writing hyperbolic columns for Upside magazine, I wrote something along the lines of "I expect to see the end of the U.S. government in my lifetime." My reasoning? "It's the internet, stupid!"

I was flattered that Tom Wolfe picked up the quote for an essay in his book "Hooking Up." He obviously had his researcher look for the most outrageous comment about the influence of Microsoft and the internet so he could show how overhyped it is.

Hyperbole aside, the point of my essay was that the internet makes many local laws obsolete. Ban internet gambling if you want, but some country somewhere will keep it legal and you can't stop people from getting access to it. It will even braek down the Chinese Firewall of censorship. Give it time.

It will also affect how we elect people, pass laws, and lobby for reform. It changes governments.

Another interesting point Donna makes in a previous post is that while Google is getting political ads, Yahoo is not. It just shows you which company is having the most influence.

 

Google censorship

Two interesting discussions at Google Blogoscoped Forum about Google censorship on YouTube.

In one, people are talking about Mark Cuban's complaint that Google says it can't filter out copyrighted material, but can filter out porn.

Sorry, Mark, two completely different issues. Copyrights can be very difficult to find. Things are not always labeled as such. And Copyrights are a legal entity that Google happens to think is onerous and stifles creativity (and I agree.) So Google uses DMA to try and avoid conforming to copyrights unless forced to. All content to all people all the time.

Unless, of course, it's something google doesn't like. Pornography is in the eyes of the beholders, so Google can censor it when it sees it. It's a matter of personal values.

In the other discussion, they're talking about the fact that Google does not filter out anti-semitic videos, despite the fact that Sergey is Jewish. This shows the company's reluctance to censor even onerous content.

This means that we increasingly end up accepting Google's view of what should be censored and what should not. Google is becoming the world's censor. I understand what they're doing, but it's dangerous to get into the censorship business. Tough call.

Google "Presently" vs. Microsoft PowerPoint

The folks over at Google Blogoscoped forum are discussing hints of a new product from Google -- called Presently, it looks like a PowerPoint alternative. Google is intent on displacing Microsoft apps, and I still think it has an excellent chance.

My only problem is that I hate all these presentation apps. There's a reason so many tech conferences ban Powerpoit. It's as boring as a speaker who just reads a script. As a reporter, I try to convince people never to pitch a story to me with PowerPoint. It puts me to sleep.

I guess VCs like it, though.

Competing with Google: Krillion – Searching online, buying offline

It’s almost impossible to compete with Google by building a better search engine. Google has not yet become lax in making new advances. 

But it is possible to find a good niche that Google has yet to fill. A startup company called Krillion has come up with one of the best ideas for a specialized search engine I’ve seen in a long time: It helps you find a retailer near you that carries just the product you want to buy.

I found out about Krillion when I did some consulting for them last year, advising them on how to talk to the press. Writing about them on my blog is not part of my service (and never will be.) I picked the company because I like its idea – if it can pull it off.

Krillion CEO Joel  Toledano, a former Yahoo executive, believes the internet is a great place to research what products you want to buy, but is not necessarily a good place to actually buy the products. Let’s face it, some products do not ship easily through the mail. Large appliances, Krillion’s first product category, is a prime example.

Toledano says that as many as 75% of people buying big-ticket items do all their research online, but make over 90% of their purchases offline, mostly at big-box retailers. “Clicks are not killing bricks,” says Toledano.

So you’ve done your research and know which refrigerator you want. Who carries it near you, and how much does it cost? Big-box stores are lousy at letting you know what they have through their web sites.

Krillion’s strength is also its biggest challenge. It has to gather the data on every product for sale at every store in every city in every country. The secret is not so much in the search technology, but in gathering, integrating and presenting all the data on a local search page. Google is simply not going to do it.

I ran the idea past Lise Buyer, who helped Google with its IPO and has since started her own consulting business (Class V Group), a few weeks ago. She liked the idea, because Google doesn’t have the bandwidth to collect such specialized data. “If it involves a lot of leg work, Google isn’t going to kill them,” she said.

Krillion says it has collected data for 40,000 locations across the U.S. for its “Krillion Localization Engine.” Its specialized crawlers search through the websites of national manufacturers and retailers to find the data, and it's working on relationships with retailers and manufacturers to get specialized data feeds of product inventory and other info.

The result: Type in the general specs, the brand, or the specific model you want, and you get a results page that includes:

· The name, address, phone number, and location on a Google Map of every retailer near you that carries what you want.

· The product’s price at each store.

· The alternate model numbers that different retailers use to try to keep you from comparing prices of the product at other stores.

· A picture and specs to confirm it’s the right product.

· A click-to-call button with each listing so that you can immediately reach the retailer and at least get them to pretend to check on product availability.

· And (the money maker): a column of ads where retailers can try to entice you into their stores with sales, discount coupons, similar products, or a promise that you can find it easier at their store than at Home Depot.

Even more interesting, in a future release, you can tell Krillion what product you want and wait for someone to put it on sale. If a local retailer offers a discount, Krillion will send you an RSS feed or email to let you know. That kind of data could induce a retailer to offer you a discount just to get the sale. After all, you’re a customer ready to buy.

The site is free, and Krillion promises no spam and no intrusive ads that muck up the real search results.

Krillion unveiled its first beta on February 5. It’s still very rough. The option to change your location doesn’t seem to be working yet. If you happen to live in Harrisburg, PA, you’re in luck. Otherwise, wait for a few improvements.

FUNDING: Hummer Winblad

ADVANTAGES: Fills a niche that seems to be unmet today. Good revenue model, because retailers will pay to reach people who are ready to buy.

DISADVANTAGES: Company still has to prove it can gather enough accurate data to make the system work. It’s an enormous task. Otherwise, Google would do it.

***

UPDATE: Toledano sent me an email asking when I found the "Change location" function wasn't working. It seems they were doing some updating yesterday. It's now working, and automatically recognizes that I'm in San Francisco. The search engine gives me a list of stores when I type in a particular brand and model of washing machine, but does not yet list the prices at the different stores, which I think will be the most useful feature. Still in beta, so let's hope that will appear soon.

 

Competing with Google: Panama and Fast Search & Transfer

Too much is being made of the prospects of a couple competitors to Google's AdSense program: Yahoo's Panama and a new offering from Fast Search & Transfer.

It's great that Yahoo has finally unveiled Panama. But this system is not so much playing catch-up as it is slowing the rate of falling behind. Vishesh Kumar at Street.com notes that Panama now ranks ads by relevancy, not just by how much people paid for the ad. If an ad doesn't perform well, it drops in the ranking, no matter how much the advertiser pays for a click.

Unfortunately, Kumar doesn't realize that Google has done that for years. As Google continues to refine its techniques, Yahoo keep slipping further behind. It's just not running backward as quickly.

Brian White at BloggingStocks.com points to a CNET article about Fast Search & Transfer. It has an ad engine called FAST AdMomentum that it licenses to advertisers to enable them to place ads without paying Google its 20%. But Google is a master at relevancy, and it's not likely that FS&T can match Google there. If the ads aren't relevant enough, nobody will click on them. Advertisers will be better off paying Google its cut.

I think both of these services are going to prove to be a huge disappointment.

The real secret to Google's success: Avoiding Evil

In June of 2000, when Google was a hot but still fledgling search engine, America Online set up a meeting with Sergey and Larry. They were there to discuss the possibility of using the company’s search engine on the media conglomerate’s formidable site.

In a Spartan meeting room at Google’s Mountain View headquarters, one of the AOL execs raised a complaint. Every search engine except Google was boosting revenues by inserting ads into search results. The AOL executive politely pointed out that Google’s top executives were being “stupid” for not exploiting this opportunity.

According to one horrified manager at the meeting, Sergey stood up, walked out of the room, and “screamed so that everyone in the meeting could hear him, ‘Someone get me a can of gasoline – I have to light myself on fire to get rid of the scum of those people!’”

Google did not get AOL's business at that meeting. It got it two years later, when AOL decided that Google's policy was not so dumb after all.

Google doesn't bias its ads because it would be an evil thing to do. It would, in Sergey's view, corrupt Google's mission statement, to "organize the world's information and make it universally accessible and useful." When people search for information, they want the best, most relevant info available. They do not want a disguised ads with questionable value.

Google's "no evil" policy plays a bigger role in its astounding success than most people realize. Its exceptional dedication to great, uncorrupted services for users draws people like ants to spilled Kool-Aid.

On the internet, that's the only way to win. People can switch services too easily. Aside from email, there is very little "lock-in" online.

Contrary to the opinions of Google critics, the folks at Google take this no evil thing very seriously. The policy was not created at Google because Sergey and Larry knew that it was the path to success, but because they felt it was the right thing to do.

I talked to a former Google executive recently about the company's policies. That person outlined some of the sacrosanct rules that everyone at Google follows religiously:

Never take private information from customers.

Never sell information about customers.

Locking in a customer prevents them from choosing the best product.

No extortion. (When Adsense was created, for example, Google decided to split ad revenues 50/50 with sites, not 80/20 like other ad services. Again, the former executive says it wasn't a brilliant plan to take over internet advertising, it was done because the 80/20 rule "just didn’t seem right to Sergey.")

You can criticize Google for bowing to censorship in China, but it was a sincere attempt to improve access to information in that country. Even so, Sergey has mixed feelings about the move.

More companies need to follow Google's example. It's counter-intuitive, but true nonetheless: If you sacrifice quality, user experience, or the free-for-all culture of the internet in an attempt to maximize profits, you just irritate people and drive them away. By  showing a willingness to risk profits in favor of doing the right thing, people flock to you and bring your profits with them.

All you need to do is compare the financial results of Google, Microsoft and Yahoo to see the proof.

Google and the press

Google's Q4 earnings are out and I shamefully lowballed my estimate this time, although investors were apparently highballing their estimates before the release. Revenues were, ahem, only $3.2 billion, up 67% from a year ago, with a profit that nearly tripled to $1.03 billion. The stock price dropped, from a peak of about $505 yesterday afternoon to about $490 as I write this.

The press described it as anything from a "blowout" quarter to "disappointing" because of higher payouts to AdSense customers. Gee, I thought that meant that the ads are more successful so more revenues are going to the sites that host them.

Think back to a little over two years ago, when the press was helping to drive down the IPO price to $85 by universally criticizing the company in the month before the IPO. They warned that Microsoft and Yahoo were hot on Google's heels -- despite the fact that both companies had already been (unsuccessfully) trying to unseat Google for two years. They said Yahoo was better because it had more diversified revenues, and worried that Google was just another overhyped dot-com company (despite the fact that the dot-commers went public with no proftis, while Google was extraordinarily profitable.

Just for a reminder, here are a few of the comments the press made before the IPO:

“an extraordinarily high premium,” “sky-high multiples,” “based more on the hype factor than business fundamentals,” “harkens back to the late 90s boom,” and “excesses of the bubble.”

And those were all from one article (“Before You Buy Into That IPO, Search ‘Lemmings,’” New York Times, Aug. 1, 2004, by Gary Rivlin.)

The New York Times was not alone. Here's more:

“Think before you buy Google” (Seattle Post Intelligencer, 8/3)

“Google This: Investor Beware” (Business Week, 8/9)

“Loving Google But Not Its Public Offering” (Financial Express, 8/8)

“Google IPO: Not Feeling Lucky” (CNN/Money, 8/12.) (This article states: “if you're tempted to buy shares of the company once it finally starts trading, which will probably be next week, here's my advice. Don't.”)

The press still has a love/hate relationship with Google. They're all scared of getting caught up in the hype. Everyone -- especially Donna Bogatin, bless her -- want to be the first to predict Google's demise.

They have a long time to wait. The simple truth is that, unless a company is cooking the books to make things look better until they can no longer fudge it and have to report a bad quarter, a company with this kind of momentum does not lose it overnight.

Remember that: 67% revenue growth. For the same quarter last year it was 70% revenue growth.

Google ain't slowing down yet. Microsoft and Yahoo are. As Donna might say, Google's growth is downright scary.