How Google Wins By Losing

Perhaps the biggest hot-button question in search is whether Google will continue rising forever, or if it will bust. Last week saw indicators both ways. On Monday, Standard and Poor downgraded Google's ranking from "hold" to "sell," cautioning against "what we perceive to be potentially excessive enthusiasm" about Google stock. On Tuesday, completely ignoring S&P's warnings, the Street pushed Google's stock to a new high of $473.31/share.

By and large, the Googlephiles and Google-skeptics are in a fight over a single issue: whether Google's expansion beyond search--from the acquisition of YouTube to products like Google Spreadsheets, made to rival Excel-will bring the company more money, or will spread the business too thin. Everyone agrees that Google's doing well: primarily through its core business of search, Google holds nearly 25% of all online ad revenue. The question is what will happen as Google attempts to go beyond search.

The Googlephiles have a lot of evidence to rely on, including Google's wealth of very smart people, its corporate tenacity, and its clearly savvy business sense. Skeptics can point to observations like those this one made in BusinessWeek this past July: "An analysis of some two dozen new ventures launched over the past four years shows that Google has yet to establish a single market leader outside its core search business."



I think that the believers and the skeptics are both half-right--which is why they're missing the entire point. The skeptics are right in arguing that Google's a clear leader in search, but faces trouble gaining ground in other areas. The believers are right in their assumption that pushing beyond search is good for Google; they're just wrong about why.

The real truth is this: Google's forays outside of search are highly valuable for the company, precisely because those forays don't succeed.

Consider BusinessWeek's assessment of the lifecycle of a Google nonsearch offering, from the July article mentioned above: "After sparking substantial buzz, most of Google's nonsearch offerings quickly fade from view. 'People give Google the victory in the beginning and don't show up later to notice that things didn't go anywhere,' says Paul S. Kedrosky, a venture investor at Ventures West Management Inc."

And here's the results of a few Google attempts to go beyond search, as discussed in the same article: "Google Talk, an instant-messaging service launched last August, now ranks No. 10, garnering just 2% of the number of users for market leader MSN Messenger, according to comScore Media Metrix. Three-month-old Google Finance, heralded as a competitor to market leader Yahoo! Finance, has settled in as the 40th-most-visited finance site, according to data from Hitwise, a competitive intelligence firm. Gmail, the e-mail service that was lauded at its 2004 launch for offering 500 times as much storage space as some rivals (they quickly closed the gap), today is the system of choice for only about one-quarter the number of people who use MSN and Yahoo e-mail."

Google expands beyond search with much public fanfare, only to see its projects fizzle when nobody's looking. Which is actually a brilliant PR strategy for driving traffic to Google Search.

By continually announcing that it's expanding beyond search, Google gains tremendous buzz, which translates into higher stock prices, which translates into still more buzz. All that attention keeps Google top-of-mind; by being top-of-mind, Google draws more users and more loyalty towards the Google brand--which means more searchers flock to Google Search, and more searchers stick with it. And it's through Google Search that Google actually makes its money.

All that buzz is only beneficial if the new launches don't succeed. If Google were to successfully expand past search, users would mistrust it as a corporate giant bent on empire-building--a problem that's certainly familiar to Microsoft. Because Google fails at really getting a hold beyond search, users don't see any effects of Google's empire-building, and instead only see Google as a company that's continually on the rise.

It's a great strategy. The only problem is that it might not be sustainable, because Google itself might not be aware that it actually exists. To take one example, it's unlikely that GoogTube is a $1.65 billion ruse to makes Google seem to be interested in user-generated video. Google really is interested in user-generated video--and in a lot of other things that are far less related to search. Until now, it's just gotten lucky enough to fail.

As I argued concerning Google Radio, some of Google's non-search projects are really extensions of its search monetization, and are likely to succeed. But others projects mean entering areas where Google doesn't have much experience, and is taking a risk. With regard to those riskier areas, the key question for Google's future is whether it can realize that losing is really one of the best assets the company has.

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