Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.


 
Thursday, August 19, 2004


I'll add an opinion on google. At $85 dollars a pop, google could be a risky investment. I'd still take the risk. Google has three main strengths as I see it.

The first is, of course, is technology and brand interaction. Their IP is well protected, their search engine is efficient and dominant. However, is it improving? Well, Google certainly spends a lot of cash on R&D. With new and innovative search companies trying to take a piece of the pie (such as vivisimo and blinkx) as well as competition from the old standards (MSFT, Yahoo, and Overture), google's search engine might no longer be the king of the hill. However, Google has been dominant for so long that their brand now has a life of its own ("to google"). This competitive advantage is important, and suggests that google will be a good investment for at least the next 3 or 4 years (or until we start saying "i'm going to microsoft this" or "yahoo it").

The second strength is their valuation, based on the stock price and number of shares offered. Google will have A LOT of cash. From a company that appears to spend their money wisely, this can only be a good thing. Unless of course they spend a couple billion developing the next big bust. The question also arises: is the valuation of google inflated, even hyper inflated? Based on its core strengths and market dominance, I don't think so. But, there's a reason this is the 'bubble' generation, and memories of tech companies, based on some graduates student's pipe dream, with zero income, ridiculous P/E ratios, and stock values in the hundreds of dollars is still a fresh reminder of the silliness that can occur.

Finally, Google seems to have developed (be developing) one of the biggest computer networks in the world. Their massive network of mostly middle of the road pentiums (with a good number of xeons thrown in to keep things running smooth) is a strong computing and storage resource.
In fact, if I were to make a wager, I'd bet (not a lot of money) that the first conscious machine will rise from this tangled network of processors, hard drives, and cables. One day google might just ask you how you're feeling today. I don't really believe that, but I do believe that google has some serious real estate in the digital landscape, which allows for the flexibility and clout to adapt to and address market demands...gmail being one good example of leveraging this computing muscle.

-- dhd // 3:45 PM // 10 comments


Comments:

Usually agree with you but this time, I'm not so sure. There's no question that google has done something unique and that there's value but I'm not sure that I'd bet on them at that price...

Having brand value doesn't mean that you'll necessarily win - witness Tivo. It's also a verb.

Agree that Google has piles of cash and that'll keep them going for a while. But, having piles of cash doesn't necessarily lead to continuing innovation or even smart use of cash.

Yes, they have a "computer network" that seemingly can be leveraged. Not sure that this is a real sustainable "competitive advantage" though...

Finally, why is everybody in the world giving these guys the ultimate benefit of the doubt, assuming that they'll be at the forefront of innovations going forward and the rest of the world will continue to fall short?

They don't own a monopoly on innovation.
// Blogger kyikme // 11:50 PM
 

I agree that what you say could potentially happen. My first comment was at $85 a pop, google could be a risky investment. I'd still take the risk, because I'm young. I wouldn't bet on it to support my retirement however. Regardless, it's an opinion. I think they've shown a good trend of innovation which should continue, I think they've established themselves with a pretty sizable market share, and at this point in time and likely for the next couple of years, I think they will be an indispensible internet tool. I'm not umair by the way.
// Blogger dhd // 6:17 AM
 

Interesting take. I too predicted a first day pop up in GOOG but my reasoning was based purely on the Dutch Auction format removing Winner's curse. Another angle to look at it was to just think of the shares as a commodity with a classic downward sloping demand curve and the equilibrium price leaving a lot of producer surplus on the table for the market to give a pop up on day 1, as all those potential buyers who had bid more than the IPO price rushed in to buy in the secondary market at a "bargain".
// Blogger Mahashunyam // 8:08 AM
 

Hi guys,

I think dhd's 'computer network' comment is a very good point. It is basically just a restatement of economies of scale. This is a very serious source of advantage we rarely think about these days in tech markets.

Why is everybody giving them the benefit of the doubt? Because their hazard rate of new innovations is massively lower than the competition. Just think about's Yahoo's recent spyware/adware fiasco. As far as search goes, for the last 2-3 years, Google *has* pretty much had a monopoly on innovation - until recently, when it missed blog search in a big way.

Cash is a great resource to have, but these days it only counts if it's linked to another resource that provides some kind of search space map. Google does this - extremely well - via it's competence in user learning. None of it's competitors have even remotely matched this. Think about Technorati's recent fiasco with the DNC, or Yahoo as detailed above.

A Dutch auction will eliminate the Winner's Curse. But presumably post-auction losers take new information (ie winning price) into account and change their preferences until they match those of the market. I chalk this up to Loser's Regret - and predict a shallow return to earth - the inverse dynamic of a 'normal' IPO.
// Blogger umair // 8:19 PM
 

I wouldn't be surprised if google starts using its computing might to provide high processor demand webservices such as video editing or related data manipulation.
// Blogger dhd // 8:47 PM
 

Hey guys. Thought I'd make a few additional comments as I'm enjoying the conversation...

I would agree that up to this point Goog has been almost an ideal blend of innovation and execution. Don't forget a healthy dose of help from traditional media just not getting it.

However, everyone seems to assume that Goog has brought massive amounts of innovations to market. They haven't. The UI. Ad insertion technology - maybe, although others have done it as well. Search algorithms - maybe initially.

I would argue that what they've been very good about is sheer EXECUTION. They're the only ones of the bunch that really were able to execute on revenue opportunities without getting distracted by every other development in the tech / Internet space. They were also very smart to PR their brand in such a way as to create an "against the establishment" manner, which struck a major chord with the Internet / tech community due to the bubble fiascos.

Agreed that they have a massive leverageable network going forward. So does IBM. So does EDS. So do most of the data center guys. Just having a "network" doesn't necessarily correlate to anything as far as innovation is concerned. I've seen lots of write-ups about Goog becoming, in essence, the de facto Internet, or the Internet's OS, etc. That's a HUGE leap, frankly pure conjecture, from where we are today.

In fact, let me throw this in... What would happen if MS could somehow leverage its installed customer base? Even a small portion of it? P2P MS? Hmmm...

Goog is not holier than thou anymore. That much is quite certain.
// Blogger kyikme // 10:24 PM
 

Hey guys. Thought I'd make a few additional comments as I'm enjoying the conversation...

I would agree that up to this point Goog has been almost an ideal blend of innovation and execution. Don't forget a healthy dose of help from traditional media just not getting it.

However, everyone seems to assume that Goog has brought massive amounts of innovations to market. They haven't. The UI. Ad insertion technology - maybe, although others have done it as well. Search algorithms - maybe initially.

I would argue that what they've been very good about is sheer EXECUTION. They're the only ones of the bunch that really were able to execute on revenue opportunities without getting distracted by every other development in the tech / Internet space. They were also very smart to PR their brand in such a way as to create an "against the establishment" manner, which struck a major chord with the Internet / tech community due to the bubble fiascos.

Agreed that they have a massive leverageable network going forward. So does IBM. So does EDS. So do most of the data center guys. Just having a "network" doesn't necessarily correlate to anything as far as innovation is concerned. I've seen lots of write-ups about Goog becoming, in essence, the de facto Internet, or the Internet's OS, etc. That's a HUGE leap, frankly pure conjecture, from where we are today.

In fact, let me throw this in... What would happen if MS could somehow leverage its installed customer base? Even a small portion of it? P2P MS? Hmmm...

Goog is not holier than thou anymore. That much is quite certain.
// Blogger kyikme // 10:24 PM
 

I thought the following two posts in the blogosphere were very prophetic in their views on GOOG's future:

http://www.ftrain.com/google_takes_all.html
http://blog.topix.net/archives/000016.html

I think they *do* realize the importance of not being evil in order to gradually transition into a benign, non-threatening monopoly, just in case they do ever become this uber-OS of the Internet.
// Blogger Mahashunyam // 5:02 AM
 

OK - think about it this way. Google has brought something more valuable than technological innovation to the game. It's brought strategic innovation. User learning, non-intrusive ads, 'not evil'/protoconstitution - these are absolutely earthshattering strategic innovations in an industry that essentially had no business model.

So I agree with you 100% that Google's advantage isn't about tech per se (check the archives, I've made this point numerous times). But I think to call it execution is to miss the point that it is strategic innovation whose effect is to alter industry structures and reshape industry economics.

I think the 'network' is of zero importance - it's the scale economies that are important. Sure, IBM and EDS have big networks. But to compete with Google, they essentially have to retool them - they face huge costs in doing so. So I think Google's scale economies are at least a minimally effective barrier to competition for everyone but the usual suspects and those new entrants that can get serious funding.

Finally, if MS leverages it's installed base, I think absolutely nothing will happen. That's because MS's economics - monopoly - are in direct and total opposition to the economics of massively distributed models - which are essentially acapitalist, and require entirely fresh thinking about capital and commerce to support them. That's a whole other story though...!!
// Blogger umair // 2:06 AM
 

Oh yah - one more thing. I agree that this notion of Google as the 'Net's OS' is kind of vapid. I don't think it means much.

On the contrary, I think Google will be the web's biggest provider of rich functionality. Think about it this way: right now, it is incredibly costly to do anything beyond publish text (or, to some extent pictures) on the Web. Even crunching data to get a graph is beyond the capabilities of the mass market.
// Blogger umair // 2:09 AM
 
 

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