Back in April, venture capitalist Ben Horowitz wrote an article on his blog entitled Peacetime CEO/Wartime CEO. He concludes that Google is transitioning from a period where it was a dominant, unchallenged player, to a period of intense competition. This is unique during the existence of the company; Google has famously declared in the past that they have no competitors, and that they seek a collaborative role with other companies.
I’ve recently read a few other articles outlining a number of strategic threats for Google, including here and here. I believe, however, that the following five categories of threats are the most important ones facing the company in the immediate future.
Editors note: if anyone from Mountainview is reading this, I have a substantial idea for Google (talking points: new data sources, new revenue streams, leverages existing infrastructure, and possible re-entry point for China). Feel free to contact me.
1. Direct competition for advertising revenue
The bulk of Google’s revenue still comes from text advertising, despite some efforts to diversify beyond that. Direct threats include Facebook’s ad program, although it isn’t clear to what extent Facebook has taken revenue away from Google. Other (probably lesser) threats include similar text ad programs such as Yahoo and Microsoft Bing. So far Google hasn’t directly responded to this form of competition, although Google+ is clearly an effort to undermine Facebook.
A secondary and indirect threat to AdWords comes in the form of coupon sites, which provide an alternate way for companies to reach their markets. All of the text ad players have products in the pipeline (or in some cases in Beta) to try to directly target the coupon market. It isn’t clear yet (and probably won’t be for a few years) whether coupons are merely a fad, or are here to stay.
To date, it appears that banner (Yahoo owns this space) and video (Google’s YouTube is the primary player here) are not competitive threats to AdWords.
So far, nobody has come up with a credible threat to AdWords. However, the lack of revenue diversity means that Google needs to protect its text ad revenue at all costs. I believe that Google will also continue to try finding new sources of revenue (I’m not smart enough to predict whether they’ll succeed!).
2. Direct competition via app stores
Google’s move into mobile operating systems was originally intended to ensure that Google’s search market share wasn’t undermined in the mobile space. In addition, it provided an entree into the app store space, which has been immensely profitable for Apple. This has brought Google into direct competition with others players in this area, including Apple, Amazon and Microsoft.
These competitors have, in turn, tried to undermine the Android operating system – Microsoft through its patent-driven lawsuits against cellphone manufacturers that use Android, and Apple et al through the encirclement campaign detailed below. So far Microsoft’s campaign has netted it money from some manufacturers for each Android device sold, but it hasn’t (yet) effected Google directly – or increased market share. This is one topic to watch closely in the next year.
Google’s app store isn’t yet a major source of revenue for the company, but it looks like this is one of the areas where they believe that they can see substantial growth. This means that Google needs to obtain new patents (expect further M&A effort here, as well as part of that huge R&D budget), fight existing patents from its competitors (lots of legal action; maybe donations to the EFF?), and modify Android code to avoid further infringement.
3. Encirclement with patents
This is probably the largest immediate threat to Google. A coalition of their competitors recently teamed up to purchase Nortel’s patent portfolio. Google has relatively few patents, most of them developed in-house (as opposed to acquired through M&A activity). The result has been that it has been hard for them to compete in certain specific areas, due to the threat of infringement. Apple and Microsoft in particular appear to be deliberately trying to encircle Google, to make it hard for them to move into new, adjacent markets. This currently primarily effects Google’s mobile efforts, as opposed to core revenue.
4. Closed markets and regulatory issues
In the long term, Google needs to find a new way to get back into the Chinese market. Absence from this market not only means the loss of a huge number of potential users, but also a non-level playing field where new competitors could arise and other industry players could gain an unbeatable lead.
Regulatory issues in Europe and other places could also hamstring Google’s efforts; the implication here is that Google will likely undertake certain voluntary self-regulation with regards to privacy, in addition to increasing its (so far small) lobbying efforts.
Google’s internal mandate is to be the premier collator of the world’s information. This has taken them in some unpredictable directions (i.e. digitizing libraries, mapping the world). One of the more obvious motives for Google+ is to try to regain lost ground with social graph data; this is the information about who people are, and who they know. The current players in social graphs are closed to Google, in the sense that it isn’t possible for them to see, for example, who your Facebook friends are. The threat of other companies out-innovating them in the realm of new kinds of data is a major driver in terms of Google’s direction. One developing thread is an effort to catalog European parliamentary proceedings (the current pretext is to use this for statistical analysis for Google’s translation engine).
In truth there isn’t much new here, since Google tends to operate in a strategic fashion already.
Look for Google to continue its traditional judo-like approach to competitors. Google+ is probably intended more as a clog in the works for Facebook, than as a direct competitive threat. Continuing to provide Android free of charge is a means of undermining Apple, while (in theory) taking away app store revenue. Chrome appears to be aimed at Microsoft (along with Google Apps).
Google has also used “open-ness” to combat some of its more closed competitors. Their support for OAuth, Open Social and other projects is clearly intended to differentiate themselves as the “open” and less threatening option to a series of “closed” competitors. Expect more free (and possibly open source) applications that partially compete with Apple, Microsoft, Facebook and others.
Google also needs new sources of data. Digitizing libraries is just a start for them. They may want to take a look at the ongoing project to catalog the ancient libraries at Timbuktu. China is also an obvious source of data that they’re going to need to reenter at some point.
Continued M&A isn’t much of a prediction. I suspect that some of Google Venture’s recent activity might indicate the overall direction.
Lastly, their 20% project time policy means that there’s always going to be new applications coming out of the left field of the GooglePlex. Much of it won’t directly compete with anybody, and so far few of these applications can be directly attributed to additional revenue, but they attract attention and drive traffic. I would expect them to continue this policy, regardless of anything that their competitors do. The vast majority of these new products will be so much sturm und drang, but its quite possible that further game changers will emerge.