Google Isn't Evil - Just Shortsighted

When Google (GOOG) and Yahoo! (YHOO) were in talks about the deal currently being scrutinized by the DOJ, there were reports that there was serious hesitation within Google that, no matter what the mechanics of the deal turned out to be, the potential negative publicity and possible appearance of monopolistic practices would far outweigh the potential benefit of derailing a Microsoft (MSFT) / Yahoo! deal.

The complaint recently filed by the advertiser’s collective and the DOJ’s purported hiring of the antitrust expert Gary Litvack may be only a short-term headache for Google, especially if Google decides to back out.   

But the longer term implications are huge, irreversible, and potentially devastating: Virtually every move that Google makes going forward will face intense scrutiny for its potential to increase Google’s dominance of the Web world.  This is quite a reversal of fortune for the company that until now has been the darling of Web users, investors, and Microsoft haters worldwide.

In retrospect, those inside Google questioning the Yahoo! deal benefits seem prescient.

Until the deal’s signing, it seemed the stage was set for Google to do the inevitable: vanquish Microsoft, and then, through its own enormous success, inherit the mantle as the new Microsoft, with all the attendant market power, wealth and, ultimately, arrogance.

Google become another Microsoft?  

“But this time it’s different.”  Heard that one before?  

In this case, however, it may be different, but not in the way one might expect.  This time, instead of waiting for Google to become the next Microsoft, the DOJ seems intent on intervening before it reaches a point that there is not much left to be done. Google’s pending deal with Yahoo! has precipitated a move now by the DOJ, a move that otherwise may not have come for several years or more.

Today, Google is Search, and Search is Google.  Looking beyond, Google early on realized that the world of the future was a Web-centric world, that the Web would change everything in terms of virtually all aspects of computing. Dominating search put it in a position to gain a dominant position in this new world, much the way Microsoft leveraged its ownership of the OS to gain its position in the desktop-centric world.   Microsoft ultimately succeeded by developing a suite of applications complementing its OS, and by the time the DOJ intervened in 1998 the company had a mass of proprietary software installed on millions of computers worldwide.  

Google understands the Microsoft playbook. Yes, today Google is Search, but only Search, and as such it is vulnerable to the next couple of guys in their Harvard or Stanford dorm drinking Jolt by the gallon and devising the algorithm that will make Google Search look positively amateurish. A full suite of Web-centric applications from Google was soon in process, and these will undoubtedly make the current Microsoft desktop-based apps look as dated as the old mainframe word processing or spreadsheet applications.

The recent surprise release of Google’s Chrome browser is further evidence of Google’s Web-dominating strategy. (In light of the DOJ’s probe, Google officials are probably regretting the timing of the Chrome release.) Today, Microsoft’s IE has huge market share. Anyone want to bet as to how fast Chrome will be on top? And what about the OS, the piece that until now has been Microsoft’s trump card? It has become clear that, in the Web world, the browser has usurped the position of the OS.  Computing in the Web world is all about the browser, and the OS will be left with all of the commoditized, unprofitable under-the-hood tasks like disk and power management.

As part of its SEC filing, the Google founders espoused “Don’t be evil” as one the Company’s core tenets.   It’s one of those touches that seem so utterly charming to investors on the brink of seeing their investment increase 10, 20 or 100-fold. But maybe a revised filing could add “Don’t be naïve” as an even more important tenet, because the logical and inescapable endpoint is that Google’s long-term success depends on dominating the Web-centric world the way that (evil) Microsoft dominated the desktop world. Google’s charmed existence will not last without continued enormous growth and profitability.  

And the only way of achieving that is to become to the Web-centric world what Microsoft became to the desktop-centric world: huge and arrogant.

No doubt that in Search Google developed software as innovative and useful as what Microsoft developed early on with first DOS and then Windows.   But Microsoft spent many years (in a nerd-celebrating culture that probably out-Googled Google’s), leveraging its dominant OS position.  

By the time the DOJ got around to policing the company, Microsoft’s OS and application software were deeply embedded in virtually every company in the world.   The DOJ’s options for reining in Microsoft were fairly limited.  Ironically, it was Microsoft itself, and not the DOJ, that eventually shackled Microsoft. Enormous success and market power breed arrogance, and arrogance is the death of innovation. This is why a couple of Stanford nerds were able to write software faster, better and smarter than the several hundred ostensibly bright programmers at Microsoft.

The DOJ scrutiny is a particularly confounding problem for Google, because the explosive potential of the company, reflected in its share price, hinges on leveraging its dominant, highly profitable position in Search to monetize numerous other aspects of a user’s Web experience. On the one side Google will face discontented investors hounding the company to mercilessly maximize profits, and on the other the DOJ making sure that Google effectively competes with one hand tied behind its back.

Many industry wags were saying that Google was the real winner in the sorry spectacle that was the Microsoft-Yahoo! takeover saga. Having achieved its short-term goal of derailing (at least temporarily) a Microsoft/Yahoo! alliance, Google brought upon itself the daunting problem of achieving its long-term goals fettered by the DOJ.   In retrospect, this could turn out to be the company’s most serious miscalculation. Don’t be evil. Don’t be naïve.  

And, most importantly, don’t be shortsighted.

Disclosure: Mark Nelson is a partner at Mithras Capital. Mithras currently owns 1.7 million shares of Yahoo!, and no shares of Google or Microsoft.

Comments

[NW Tech:]

I am glad to see the DOJ at least look at how Google makes it's rules. No longer do I believe the mantra of "do no evil" as everytime Google changes their algorythm, thousands of small businesses catch a bad case of the cold.

2008 Sep 15 10:17 AM