Google’s vision might be to eventually migrate all apps to the web. But in the interim it has to content with Microsoft and Windows, and perhaps that is one of the reasons it needs to team up with Adobe, either as a partner or just by gobbling it up. By Ariel Porath
Given the spectacular growth achieved by Google (GOOG) over the past several years, it is often hard to pinpoint holes in its platform that would affect its strategic position. Allan Leinwand’s post regarding the benefits of a Google-Adobe (ADBE) merger pointed to a very important aspect, video-based advertising, which will certainly be a crucial growth area going forward. I agree with his argument that such a tie-up would become a conduit to several more strategic opportunities. In short, it would give Google the combination of managed networks, applications, developers and clients to finally challenge Microsoft’s (MSFT) stranglehold on the desktop.
To put the opportunity into perspective it is important to consider the renewed focus of Microsoft on Google’s core revenue stream- advertising. As importantly, it would be useful to consider the lessons Google may have learned from its environment- namely how Amazon (AMZN) and Facebook are providing game-changing infrastructure and social mediums.
When combined, creating a more vertically integrated Google, which embraces open applications and the developers who create them, becomes a strategic opportunity- which if properly managed may become the model for future revenue growth. In the scenario that follows, Google would use the enormous financial reserves that it has garnered to maneuver into the gaping hole in its current model- namely its indirect path to the desktop and to the developer community who may have been stifled by Microsoft in the past.
For starters, it is often overlooked just how competition-free Google has been (from the market leaders, such as Microsoft and Yahoo) in its run-up to dominance. By the time Microsoft broke off its relationship to Overture and Yahoo (YHOO) dumped Google in favor of its own search technology, Google’s trajectory towards market leadership was virtually assured. That ‘virtual’ lock became reality when Yahoo could not put the pieces together with its search/ad engine purchases (Overture, AltaVista, Inktomi) to create a worthy competitor.
For whatever reason (Linux, Developers flocking to Open Source, DOJ, etc.) that occupied Microsoft, Google wa able to sneak into a relatively nascent market (consider what that Doubleclick was a market leader pre-Google) and create a page-level contextual ad model that served all stakeholders to become the market leader. I doubt that MSFT really took Google that seriously until they saw the Public markets shower Google with adulation and a exorbitant market cap.
It wasn’t so long ago that VCs and Bankers thought that Google was being extremely aggressive with its valuation when they offered to buy Friendster for $30M several years ago (if I recall they gave themselves a $3-5B valuation). How times change… It seems that after watching Google’s position emerge from the sidelines, Microsoft has finally awoken from its ad-targeting slumber and started to react the way it should- buying aQuantive for $6B, locking up Digg and Facebook ad deals, and turning its attention to the importance of advertising in general (which as Alan mentioned- is still greenfield in so many ways).
Does anyone really think that Microsoft is not preparing to target Google by building an ad sponsored Silverlight-based productivity suite in the future? This is potentially an enormous problem for Google considering 98+% of its revenue is derived from advertising. Long story short, if/when MSFT gets serious about devoting its abundant resources to building up advertising, then the competition-free, low hanging fruit is gone for Google and they are exposed to a serious, focused and very real ‘new’ competitor. It would be hard for Google to bully a company that is so experienced in the practice. As Microsoft encroaches, Google reaction is naturally to…
Go after MSFT bread and butter, the Office suite and all sorts of Desktop apps. To accomplish this they need three real things:
- A desktop presence
- A developer community
- Luck.
Despite the abundance of good fortune that has fallen Google’s way since its inception- future luck is not something it can easily control. That is not the case for the first two needs, a desktop presence and an experienced and creative developer community, which serves as the foundation for an Adobe merger. In a future filled with dynamically targeted managed services that interact seamlessly with desktop clients to form very rich applications targeted to the specific user, Google needs to have a desktop presence that has real ubiquity.
Save MSFT, no one can match Adobe for desktop ubiquity with Flash and Acrobat. The whole promise of AIR is that the distributed infrastructure exists for AIR to take off. As important to note isthis- as the web has become more standardized, the designer and developer communities have been forced to come closer and closer together (just look at what Silverlight is trying to do for designers- in effect making them developers).
Google, for all its success, has no developer community to speak of- but Adobe does. I would not be the least bit surprised to see a future of Google managing (Amazon EC2+S3 style) a developer/design community that they are fostering built on the the best rich apps that Flash, Flex, AIR have to offer. In effect, they would be offsetting Microsoft’s biggest advantage- Desktop Client Distribution- by creating a massive managed application environment which runs from the cloud to the client- all operating harmoniously. In a sense, its the Facebook model for rich client apps (read: extremely profitable productivity apps), rather than for simple profile features (w00t! iLike Challenge).
As MSFT gets serious about advertising, Google’s push to the desktop is just beginning in earnest. My prediction is that the model of picking off feature companies (Jotspot, Grandcentral, Upstartle, etc.) is not scalable for Google. They will need to find a way to create the operating platform for developers and designers to operate within. The natural advantage Google brings is in its ability to contextualize disparate data.
This advantage will only grow in a structured environment (in a similar way that Facebook can contextualize profiles in a structured environment). I believe that Amazon’s Developer Model and Facebook’s Open Application Model paint a pretty direct path for Google to follow.
Finally, I think the War over the Desktop, where so much latent value resides, is really where we will see this market going. If this is the case, Google will need to come together with the companies that fill the holes in its platform. The migration from targeted ad serving for users to targeted applications to situations is within its reach- if done right.
The question becomes- will the value be derived from the Web on down (Google/Adobe Community) or from the Desktop on up (MSFT Desktop and its huge Developer Community). Time will tell I suppose, but I think the surest way for Google to position itself is to become a development and infrastructure environment where it can foster a “relatively” open movement in its coming war with Microsoft.
Porath is the CEO of a pre-launched startup in New York. Formerly, he was Director of Strategy and Business Development for Metaweb Technologies in San Francisco.
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