Google Dethroned?

There's a truism in Silicon Valley that Peter Thiel describes in my book: No publicly-traded Internet company stays on top for more than four years. We saw it with Netscape, Yahoo (YHOO), eBay (EBAY) and I think we started seeing the beginnings of it with Google (GOOG) at the end of 2008. The company reports earnings later today, and as Paul Kedrosky and I discussed on TechTicker, analysts have been slashing growth estimates, although it's still in double digits, and clearly outperforming other Web names.

But, truth be told, in this Darwinian Web cycle, the financial results are a lagging indicator when the king-du-jour of the Internet gets dethroned. If you look closely, we're already seeing loads of signals that Google is losing its grip on Web supremacy.

• The Inauguration: I flicked to this in my daily Yahoo "ValleyBuzz" post yesterday, but it bears noting again. Look closely at the Web stats on Inauguration day. While Obama was taking the oath of office and delivering his speech, Google's stats shows a decline in search activity. Meanwhile, Twitter and Facebook usage soared. This speaks volumes for two reasons. One: It proves why Twitter and Facebook are ultimately more powerful sites, and paradoxically it's the same reason they are so tricky to monetize. They aren't about "transaction" they're about "connection." People went to Google to find specific information about the President-Elect and the ceremony. People go to Twitter and Facebook to share the experience with one another. That means, Twitter and Facebook are delighting users more than Google, because they are keyed into natural human needs and emotions that trigger far greater and more addictive endorphin rushes than just finding a piece of information. But far more telling and troubling was the explanation on Google's blog about why their numbers went down: Because people were obviously glued to the TV. Maybe. But they were also on other sites. Google no longer gets where the Web and its audience is going.

• Hulu/YouTube: Ok, we all thought Hulu was an utter joke when the networks first talked about it. But it's amazing, and its traffic hasn't dipped after the election as many thought it would. Sure YouTube is bigger in volume. But so many of the videos are user generated content in which I don't have any interest. They're like the thousands of listings for "Buy It Now!" socks on eBay. But Hulu isn't just better because it can have professional content: It's the technology. The last three times I've looked for a video clip, I've spent half an hour scouring Google and YouTube only to get a flood of inaccurate results. Each time, I've tried Hulu as a last resort, and found the clips within minutes. Hulu has better fields, parameters and user interface for searching videos than Google, which still appears to search for video the way it would for text. Hulu won its own game (content) and shockingly in video beat Google at its own game (search).

Peter says in the book that there are two reasons for this four-year curse. The first is that the farther a company gets from its big IPO moment, the more rapidly it loses its smartest employees, which is basically the only asset that matters for a Web company. See this TechCrunch post on why people leave Google, but really it's the same story with any company that's on top for this long. Its heyday has passed in terms of the well-understood stock option game of Silicon Valley.

The thread on that post, leads me to point two: Hubris. In the case of AOL, Yahoo, eBay and Google, each company became deluded they could do no wrong, they would always grow, and were smart enough to continue to lead the market. But not a single one has successfully anticipated the next big thing online. Amazon is the only Web company to come close, even if it's still mainly known as a bookseller. The examples above-- and many more out there-- point to the same hubris now strangling talent and innovation at Google. The assumption that if people weren't searching, they were watching TV on Inauguration day. The assumption its video search and technology would naturally be better than that of a media joint venture. And the haughty hiring process.

This is not to say Google won't continue to dominate what it does well, the way Yahoo does as a mass content-aggregation portal. This is not to say Google doesn't still have an amazing business model, just like eBay still has an amazing business model. But its golden child, do-no-wrong reign is ending. Reporters have been saying for four years that with more than 90% of its revenues coming from search, Google is a one-trick-pony; it's just been one phenomenal trick. And despite the billions spent on acquisitions and hundreds of beta projects thrown at the wall, the reality is Google hasn't been able to find a solid second trick.

Now that it's 2009, Google may be a bit past the four-year mark of Thiel's curse, but not for long.

Disclosure: No positions

Comments

[anvor:]

Sarah is darn convincing on the macro-level. On the micro-level she alluded but skipped over one thing: Google managed to screw up its management model just like all other "four-year" wonders. Management hubris is virtually irresistable: once you've got the power - you're addicted. As I pointed out elsewhere, being a management researcher I’ve always thought that the accounts of the “uniquely productive” properties of Google’s loose’n'messy management system were more glitter than substance. On TechCrunch accounts point to the proof.

While productivity of human collaboration can be improved by better organizational structure, better incentives, or bonding effect of a worthy goal (and sometimes by manipulative charisma of leaders), Google’s “smartest guys on the planet” have failed to invent the smartest organizational environment. Now that the carrot of stock appreciation isn’t there, expect more stick… Which is rather sad, since there are far better solutions to this.

Googlers and others, tell me if I am wrong (or right) at [e-mail]

Jan 22 02:17 PM

[User 265729:]

If you think about it for a minute, all of cyberspace is "pie in the sky."

All an investor can do is hope they're not the ones with pie in their face.

Jan 22 02:46 PM

[Firat Ünlü:]

Google dethroned? By what and whom?
To me it seems more like analysts have come down to reality with their predictions on Google. As long as they remain top at searching they'll have a decent base from which to operate from.

Jan 22 03:13 PM

[Good Point:]

Finally someone tells the truth.

google is to the best is someone's got lucky. do you think people will continue click their ads? no way. they only do that when they couldn't find result. how much chance is that?

Jan 22 03:31 PM

[SJGuy38:]

It is about time. Google has always thought too much of itself and it is nice to see that investors are finally starting to clue in.

Take a look at their cafeterias, as well as where some of their company property (yes, where company property goes). You won't be surprised to see that there is needless spending that Googlers, as well as management, feel they are entitled to.

I don't think Twitter will do anything profound to Google's bottom line, but Facebook is another story. People are getting used to the new look of Facebook, but what has Google done in social networking? Orkut? Please.

Jan 22 03:40 PM

[Mafeking:]

Sarah, terrific article.

I shall be looking out for your insights in the future. And you are right. My kids look at Facebook and use it to connect and hardly ever bother with Google except to do quick searches. They don't bother with the Google ads.

Even things like Craigslist - pretty lame, but it gets more attention.

Jan 22 04:03 PM

[byrdie:]

I think google is the greatest! and all you fickle people will regret if you havent invested in it. Ha Ha, I have made a bundle of money. You have to know whens to buy and whens to sell.

Jan 22 04:34 PM

[LarryBlumen:]

Me to all: nice try.

Jan 22 04:37 PM

[User 342593:]

This article is lame indeed. You are comparing an event ( the inauguration) with a daily need for online users to seek new information.

The Internet is not all about making connections. Myspace was way big even before Facebook and Twitter spawned on the horizon. It made no impact on Google.

Google is well entrenched. You will need to come up with a better argument and stop wasting readers time with no end purpose in mind than just rant because you get paid to do so.

Jan 22 04:42 PM

[Daniel Eskin:]

After all the time I spent in website design, I'm pretty sure good is about to take over the internet business of advertising.
Even though some of the points are definitely agreeable with in this article, the author neglected to mention the huge amount of advertising fees and the huge majority of them that Google owns.

I see it like this:
1. Companies won't stop advertising on the internet.
2. The internet is still in its baby-steps phase.
3. Google owns an overwhelming majority of all internet advertising.
Therefore, Google owns the internet

Simple, right? =)

Jan 22 04:51 PM

[CJJ:]

If you're going to be negative just for the sake of being negative why don't you just write an article about the economy, banks or the housing industry.

I'm not going to put down anyone's freedom of speech or to write about articles of their choice but I can go on the internet right now and find umpteen articles a day trying to put down even the best companies. What was this article based on? A 4 year cycle. Great premise.

Let's just change the USA to NON(Nation of Negativity) because that's all you hear.

Jan 22 05:16 PM

[Dave Black:]

What slipped by today is that Google is no longer the best place to work either, according to FORTUNE (a BW competitor I know). Google held that spot for two years and instantly catapulted there in its first year of eligibility.

NetApp is now number one. (I do communications for NetApp so full disclosure here.)

I think Google is a very well run organization, but personally, I'm glad to see some other companies getting a chance to get some exposure. Google has been a part of nearly every tech story for years, and there are many other companies in the Valley and beyond doing some very cool things.

Jan 22 05:19 PM

[Chris B:]

Yahoo was dethroned when Google came along with a better product. Everybody at that time thought Yahoo "owned the internet" and were too big to be challenged. They supposedly had all the smartest people working for them and economies of scale that ensured technological dominance. However, with the scalability and universal distribution of the internet, Google became the leader the moment people realized they had a better service. It was basically built in a college dorm room.

It's safe to conclude that the moment somebody comes up with a better search service than Google's algorithms, the dethroning process will occur again. That better product will be artificial intelligence (AI).

Some university student will beat Google with an AI search engine that actually answers your questions rather than just matching text strings. Input such as "Who was Alexander Hamilton?" or "What medicines contain hydropentane?" will result in a report written by the computer from internet sources rather than a list of websites that contain those words. The output will be logical and understandable. In that sense, Wikipedia and WebMD resemble the future more than Google or Yahoo. A true AI interface connected to knowledge sources is all that is lacking to be the next great search portal.

If you could build such a thing, would you give it to Google? I'm sure Larry and Sergey could have landed great jobs at Yahoo.

Jan 22 05:34 PM

[bigmoney:]

I am reading this seekingalpha article with help from Google RSS. I also have a facebook, which sends me an email to my Google Email. And when I am distracted by all this internet stuff, my Google Calender pops up an alert to tell me when to do stuff. I never really thought of google as a one trick pony. If anything, its taking over my life, like the Borg.

Jan 22 10:40 PM

[Tradememe:]

Google dethroned. By whom ? Facebook or Twitter. But first they need to have a business model.

Jan 22 11:56 PM

[htnmmo:]

Sarah,

Google hit it's IPO at the right time. They waited till after the first tech bubble but caught it in time for the second one.

The whole economy was booming as a result of the reckless lending. The housing market wasn't the only one affected. Speculators were driven into many different markets causing price inflation. Just like people thought that house prices would continue to rise, people believed Google could sustain tripped digit revenue growth.

The internet was not immune from speculation, and companies like Google made it easy to pan the banks.

They started out with triple digit growth in ad revenues but that started to drop in 2007. Right now ad revenues are down to 20% for Google's sites, but many AdSense publishers have been complaining. While Google's ad revenue is still increasing, the revenue going to AdSense publishers has plateaued.

Last quarter, even though AdSense revenue increased, AdSense publisher's share was less than Q3.

I have some more info and charts at
www.howtonotmakemoneyo...

Jan 23 11:39 AM

[Alex Ikonnikov:]

Google is far from being dethroned!

And to argue the one trick pony... just take a look at their options page - www.google.ca/intl/en/.../ .

They have many options which they can monitize. Maps, Blogger (even though Wordpress is the leader), Google Reader (which recently acquired Feedburner), and lets not forget they own Youtube which has huge room to grow in terms of monetization.

And Chris B... Google has already started working on similar AI search results that you are talking about. Google Search already answers your questions when you type them in.

Twitter is growing at a tremendous rate... but aa some people pointed out, they still don't have a business model and a limited room to expand on unlike Google.

Facebook... is a fad.. as an avid user of facebook since it came out, I've almost stopped using it altogether. I may use it from time to time to check my messages, say Happy Birthday to someone, but that's about it. My time on facebook went from hours a day to maybe a minute a day. And once again... where is Facebooks room to expand? Sell information to Government? (which they probably already do!)

I will try to expand on this topic on the Young & Invested blog... with real stats.. and even the downside of Googles massive size

Jan 23 11:51 AM

[Daniel Eskin:]

Great comment younginvestor

Jan 23 12:21 PM