Robert Scoble recently wrote an interesting post, about FOG - Fear of Google (an acronym coined by CEO of eMarketer Geoff Ramsey). I observed this phenomenon strongly first hand at the Web 2.0 Expo and shared my thoughts on it in the R/WW post Thoughts from the Web 2.0 Expo. There is little doubt that the combination of Google's exceptional revenue growth, continuously release of innovative products, and market share dominance, has created a considerable amount of fear, uncertainty and doubt.
While understandable, I believe in one area Google is more vulnerable than analysts appreciate. More than one-third of Google's revenue is completely out of their control. To be more specific, in their most recent quarterly results 37% or $1.35 Billion of revenue came from advertising delivered on other sites. Specifically, I believe they are vulnerable in much the same way that Microsoft was vulnerable in the mid-nineties.
If you think back with me, no one would have believed that thought leaders like Paul Graham would be declaring Microsoft dead just a decade later (and he wasn't alone). Obviously, Microsoft is still generating considerable revenue - see the compelling response by Don Dodge. However, they are not feared by competitors and valued at a premium by Wall Street, like they were just ten years earlier.
So what's happened and should we anticipate a similar event occurring in Google's future? I believe the answer is yes and I'll try to lay out the likely scenario in the remainder of this post.
What Happened at Microsoft?
First, it is useful to examine what happened at Microsoft. Certainly, some of the platform on which innovative applications were built, along with users attention, shifted from the desktop (where Microsoft dominated) to the web. This shift enabled competitors to execute more aggressively.
Yet another component, that can't be overlooked, was the emergence of competitive open source software projects. The transparency and accessibility of open source projects like Linux, MySQL and Firefox changed competitor and analyst perceptions of Microsoft. I also believe (although don't know how to quantify it) that it also changed users' affinity and trust with the Microsoft Brand.
Where could Google Be Vulnerable
As I've already alluded to, I believe Google is currently in a similarly vulnerable situation. It would be a serious blow to the organization to see more than one-third of their revenue evaporate. (While they do have contracts with some of the larger online properties that leverage their ad network, even in that case those networks could switch when the contract comes up for renewal.) Just like Microsoft saw open source projects emerge and disrupt their dominance, I believe a competitor in the ad network space (hereafter referred to as an "open ad network") could introduce a new more open and transparent economic structure to the ad network ecosystem and disrupt Google's Network Revenue.
Specific Proposal: Open Ad Network
Typically when discussing this with someone, the first thing they point out is that there are other ad networks online today. Yes, there certainly are lots of competing ad networks, but they tend to operate within the same economic structure that Google does and not as well. They secure the advertisements and deliver them on a partner's site, keeping a percentage of the revenue. This made more sense when the original ad networks were emerging, because the ads were sold via expensive direct relationships with the advertisers. However, more recently, a significant number of the ads are sold to long-tail advertisers via a self-service mechanism.
A few months ago, I wrote two "think out loud posts" on my personal blog reflecting on how an 'open ethos' could reinvent an industry. (Part 1and Part 2). While thinking through those posts I came across an excellent book by O'Reilly that came out in 1999, "Open Source: Voices from the Open Source Revolution". It included an essay by Robert Young, one of the founders of Red Hat.
One of the quotes has significantly influenced me since first reading it. Robert states:
"You can't compete with a monopoly by playing the game by the monopolist's rules. The monopoly has the resources, the distribution channels, the R&D resources; in short, they just have too many strengths. You compete with a monopoly by changing the rules of the game into a set that favors your strengths..."
At the time, no one knew how successful Red Hat would become. However, it certainly has done exactly what Robert predicted -- changed the rules of the game. That is exactly what I'm proposing, changing the rules of the game such that the publisher who delivers the ad would keep 100 percent of the revenue. However, just like there are for-profit open source companies (see my post on Open Source Business Model) -- this would be a for-profit open ad network.
Ok, how do you make money?
Recently, I interviewed Chris DiBona, open source program manager at Google. He had an interesting take on commercial applications being 'vulnerable' to open source competitors. Rather than talk about companies being 'vulnerable' he talked about them changing their business model:
"Here's how I think of it: if a commercial entity finds that they can no longer sell their software because a viable open source project has risen to displace them, they really have to decide if they want to start selling services around the open source offerings or get out of that particular line of business. IBM has done a terrific job of the former."
That is exactly the model I'm proposing. It's just that instead of talking about software license revenue evaporating, I'm talking about a new entrant making it no longer profitable for ad networks to take a cut of the revenue for ads displayed on their partner's page views. An open ad network would force the industry to make money by selling services around the network, instead of taking a percentage of the revenue on the network.
How is this different from Open Ads?
When talking with people about this concept, they tend to gravitate toward the open source ad server - Open Ads (formerly PHP Ads). While I do believe that Open Ads is serving a valuable role, they are not an ad network, but an ad server. Interestingly, they are paid affiliate revenue from networks for encouraging their customers to augment their inventory with popular ad networks inventory.
What I'm proposing certainly could leverage Open Ads as a framework for the ad server. However, it would have to be a hosted solution that simply runs Open Ads as the server.
So what would the effect really be on Google? First of all, this is purely speculation at this point. Someone would need to start the project and then we'd all find out. (By the way, I'm happily running business development and product management at mSpoke, so I'm not going to be the one who does this.) However, since I'm the one speculating, my opinion would be that Google would still continue to grow via ads displayed on their own site. Just like Microsoft has continued to grow, even after open source competitors emerged.
However, if the above model came to be, then Google would have some real short-term earning expectation challenges if it lose a third of its revenue. More importantly, I believe this would dramatically reduce the ubiquitous FOG -- Fear of Google -- that dominates the space currently.
What are your thoughts? This probably will be controversial, so let's discuss in the comments below.