Google--market disruptor or destroyer

Is Google a source of creative destruction--or just plain destruction?

I'd argue the former, although to companies whose industries are getting undercut by the Google juggernaut, the "creative" side of Google's market-changing activities may appear out of reach.

Google is steadily implementing a strategy, across many markets, of building services that sit right in front of the user and that act as gateways between the user and other online services. Google makes money from traffic to these gateway sites, as well as, oftentimes, from the sites it directs traffic to. And Google ends up controlling the game.

How do other companies make money and build loyalty among consumers when their services become commodities, access to which is doled out by Google? Their business models are getting destroyed--perhaps deservedly so, though not always. Some new companies are figuring out how to work in a world where they have limited direct access to the consumer and very little brand loyalty. But companies with older models to protect are having a hard time adjusting.

Of course, Google is hardly the only reason these industries are facing disruption. New technologies and new consumer trends have made some change inevitable. And many of these markets, such as journalism, are easy pickings. But there's little question that Google's prevailing business model is predicated on landing smack in the middle of existing markets.

More than a decade ago, banks fretted that Microsoft would become an intermediary between the financial world and its customers. Microsoft never quite managed to pull that off. But Google is doing exactly that in several markets (admittedly, with mixed success) and attempting to extend its reach into new areas, such as social media.

Let's look at a few examples:

Journalism

The number of users who arrive on news Web sites, and on blogs, via Google search (known as the "side door" among publishers) is increasing. People coming to a story via search don't get to experience a site's full brand. Loyalty is reduced.

This is a destructive pattern for the old media model. In every periodical's publishing endeavor, you have your hit stories and your misses. Mostly misses. Writers keep banging away at their topic areas hoping to get a killer story--a scoop of fact or of perception, a conversation starter, something. They are paid to keep trying. They are paid for the stories that suck. The famous San Francisco daily columnist, Herb Caen, once said that if he wrote one good column a week, he considered that a success. In the traditional model, through advertising and subscriptions, the readers paid for all the stories, even the boring ones.

At this week's Google I/O conference, browser app and Google platform developers vie for attention.

(Credit: James Martin/CNET)

When traffic to stories is gated by PageRank and search, and stories are directly monetized, only the top page-turning stories make money. The money leaves a clearer trail than it ever did, and publishers follow it, opting for the production of sure hits. Journalism faces destruction because journalists and their publishers learn to fear risk-taking.

I am convinced that there is a creative way around this destruction, since telling a good story has always been one of the most prized skills in society, and creativity does not survive being put in a box. I also believe it's a positive development that writers now know immediately when they've written something their readers like. But I do think that the traditional business model for journalism will have to be destroyed before it is rebuilt for the Web.

(To be fair, Craigslist has had a big hand in the destruction of the newspaper business, too.)

Telecommunications

Google Voice combines SMS and voice messages into one in-box.

(Credit: Screenshot by Rafe Needleman/CNET)

Google Voice has the potential to creatively destroy the telephone industry. While at the moment it needs existing phone networks to function, there's reason to believe the company will at some point begin offering phone service of its own, or at the very least work with mobile carriers (as it is with its Android mobile phone operating system) to create a Google-branded telecommunications experience. But unlike other Internet-based telephone solutions that require people to transfer their numbers and contacts to the new system, Google Voice will also work for people who don't move over all at once to the new system. That makes it insidious, and damn smart.

People who start giving out their Google Voice number instead of their existing landline or mobile numbers stop relying on their carriers, since their number easily can move with them when they switch services. And don't even try to compare managing a local number portability change to Google Voice; it's not fair to the telecoms. In many ways, Google Voice is a superior front-end to existing phone services than is any current telephone handset, due to the ways it does visual voicemail (with voice recognition, spotty though it may be), and its capabilities to handle multiple phone lines, SMS, and rule-based call routing. Google Voice is a strong "gateway" to other phone products. It's worthy of users' loyalty, so much so that it may destroy traditional carriers' balance sheets by increasing their churn by a rate even greater than it is today.

The good news is that it may force the carriers to finally start releasing customer-friendly services. But I doubt they'll be able to do it fast enough.

Operating systems

When the Web browser becomes the primary framework that developers write for, Google wins. And you know who loses. Microsoft (and Apple) should fear Google, which is currently pushing a lot of change through the browser world.

Since the company introduced Chrome, it's been pushing browser developers to finalize, adopt, and roll out HTML 5, a new version of the core page rendering language. HTML 5 adds capabilities that make the browser a much more capable application platform than it has been to date. With HTML 5, applications can work quickly and smoothly (like real desktop apps), and even work when disconnected from the Internet. Ultimately, people will stop caring much about what operating system they have underneath their browser; Internet Explorer and Safari are insufficiently differentiated to lock users in with their host OSes. Sure, users still need an OS and have to pay for one, but their loyalty to the platform will be undermined, reducing repeat purchases and driving down price. (Adobe Flash and AIR could also, theoretically, get killed by HTML 5.)

The creative part of the OS market destruction: It forces OS and hardware manufacturers to innovate and create things that the browser cannot deliver. You still need a box to hold your screen and keyboard. You still need speed and good battery life. You need some level of local machine security. And mostly, you need an operating system that gets the hell out of the way so people can focus on their new browser-based apps. The real destruction is in the profit margins on these new invisible operating systems. Who wants to pay for something they'll never see?

E-mail

Google killed the e-mail business years ago, when it launched Gmail. Prior to that, there were free online e-mail apps, but they were limited in storage and features. If you wanted really capable e-mail, you paid for an app (or downloaded a freeware version), and you paid for an e-mail service. Gmail decimated that business. However, there are still e-mail servers running and providing value to their users--even if those users may be using Gmail to access their mail.

Now, Google is trying to destroy them, too. The brand-new Wave product is a clever (and, frankly, overdue) re-think of how e-mail should work. But to take full advantage of Wave, you need to use the Wave service on Google's servers. Google does plan to open up the platform so Wave can front-end other services, just like it did in Gmail, but that's a stopgap to bring old-fashioned e-mail users into the Wave world. Google will run the Wave servers. (Update: This turns out not to be true. Please see my correction: "Google won't run all the Wave servers.")

Of course, Wave may not succeed. It's a dramatically different approach to e-mail, compared with what people are accustomed to. But if a new generation of users can see its value, it could make a big dent.

Advertising

Of all the industries Google has wrecked, probably none need wrecking more than advertising, and the destruction is under way. Google (and other companies) have contributed to ads that are highly targeted, metered for performance, and market-priced. This is what modern advertising should be, but it kills the old model in which gatekeepers used or invented information scarcity to prop up the prices of ads.

The advertising business was not built on openness and transparency. It was built on influence, expensive surveys, and handshakes. The new model empowers advertisers to find the people they want to reach, with more or less transparent pricing. It increases the value of advertising dollars by creating visibility into the product.

Since online ads can be so highly targeted and so closely tracked, big advertising contracts are slowly making their way from traditional media to the Internet. This is good for Google, and it's good for the rest of the Web as well.

Google doesn't win every battle. It has not taken the gate position in the social-networking space, and I don't believe it can topple Twitter (unless it buys it). But Google is very good at taking old, tradition-bound markets and figuring out how to sit on top of them.

[SCheatham]

Much appreciated Needleman...some rather valid points that add to the already humming debate around Google's path forward... thanks for the article, provided a couple good reminders...

[cb3431]

I guess we can all enjoy paying higher prices at stores to pay for Google. Google kindly keep your nose out of my business and my wallet. Nothing Google does now or in the future is welcome in my computer world.

[jmfb_k7]

umm, I'm pretty sure the article implies that store prices will be lower. If you read the section: "The new model empowers advertisers to find the people they want to reach, with more or less transparent pricing. It increases the value of advertising dollars by creating visibility into the product."
Basically what this is saying is that before google, Nike or Coke had to pay billions of dollars to get their ads out everywhere, so that eventually basketball players and kids and such would read them. And old people and disabled people would see them too (even if they have no interest in the product). But now with google, the ads only show up when it see's a basketball player or kid. This makes the advertising much cheaper, and so Nike doesnt have to pay as much and so their product costs dont have to make up for the advertising expenses.

So unless you work for an advertising company, you will benifit. But I still recomend you keep blindly denying the obvious and hold tight to your "ways". And when AT&T tries offering you a better deal on your phone bill to compete with google, tell them you want to keep paying more because you wont support google anyways.

[ThatGuyKC]

An interesting read and well written. You don't seem to really bash Google for being creative and even ingenious at times. You comes across more as matter-of-fact in verbalizing what may not be blatantly obvious to the average consumer or even the leaders of industry who stand in the line of fire.

The article is definitely fodder for conspiracy theorists who tout the mantra of "Google World Domination", but would that be so bad?

[picomos]

"The article is definitely fodder for conspiracy theorists who tout the mantra of "Google World Domination", but would that be so bad?"

Anyone company dominating the world would be bad. whether is MS, Apple, Google or the Red Cross...

[pentest]

Yes it would be bad.

A company whose only business model depends on knowing everything about you is not a good company.

Google is THE biggest threat to privacy, and thus freedom in the world right now. That is not exaggeration, it is simple fact.

[gerrrg]

@pentest

Wrong. With Google, you get to choose / opt out of sharing your info. With your credit card company and most any other company, it's not so easy as clicking on a button. Further, as was evidenced by Heartland's break-in, your information is far easier lost through lax security measures at financial institutions than by Google's actions.

And it's extremely simplistic to link privacy to "freedom in the world". Why, someone might argue that A LACK OF TRANSPARENCY is the biggest threat to freedom.

[Ikshaar]

I don't think the use of the word "destruction" to qualify Google behavior is a fair assessment. I see a company which has thrive by providing what users wanted... the fact that others have failed to do so is their own fault.

Using mostly Linux, Google has been a "liberator" by providing us search engine, email, browser and soon voice option which broke the monopolistic positions held by those companies. Even your analysis of how Google killed email is far-fetched. I never paid for an email software even before gmail. Again where you see Google killing a market I see Google showing people you don't have to pay for this, it exists for free. Also you forgot that most enterprises are still using commercial email software.

What I would concede is that Google have already or will soon reach the "too-big-to-fail" status.

On the journalism part (which is completely apart from the other you mention), because the content is produced by the people who works for the newspaper, I think Google is well aware it needs them to survive but that is not to say newspapers don't need a new business model.

Blaming Google for every changes brought by the internet is not a correct analysis.

[johnisfun]

Thanks for the interesting article, although I think you are overestimating the influence that Google will have! As time goes by and the tech industries get more diversified and better understood by investors and policy makers, domination by a single company becomes less likely, i think.

[alexcnovak]

Even as Google shifts everyone's paradigm, its brand name recognition and the loyalty it breeds is such an "... old, tradition-bound market" tactic.

[forever4now]

I think Google (and Apple) are causing a kind of technology renaissance, through their vision and leadership.

- How sleepy was the mobile phone industry, before Apple introduced the iPhone?
- How profitable was online music, before iTunes?
- How sleepy was Microsoft, until Apple & Google started to encroach on their turf (Vista?, WinMo?, IE?)?

There are tons of examples!

Tech is EXCITING again and yes, there will be casualties (didn't the PC almost kill off the mainframe?), but companies and industries will transform or die. This is a time for companies/industries to empower their best.

[jmfb_k7]

Google's success directly reflects they're employment strategy. I'm sure that if Microsoft went and collected all the best of the best employees for each position, you would see them chugging out new developments like ricecakes.
The problem with the other companies is they dont recognise talent when they see it. I remember when Google origanally came out, all I heard about was what a great place to work it was. There was even a waiting list of people who wanted to work there but were not good enough.
Any new companies looking to startup and compete in an already defined market would be wise to go to their competitors and look for the good employees, and do whatever it takes (salary, work enviroment, benifits, parties, etc...) to steal them away. Soon you will find yourself pumping out a great product that kills the competition, while they're busy sourcing new hires and training them in a struggle to keep up.

[t8]

I also think Google flew under the radar of Microsoft and other companies long enough for them to build a company robust enough to not be destroyed. Remember Netscape. Netscape promoted the fact that the browser was the OS and they registered on Microsoft's radar quiet early and they were annihilated.

I remember reading how Gates was looking at job vacancies at Google one day and it dawned on him that they were competing with Microsoft when the job descriptions were similar to theirs. By the time he figured that out, it was too late.

[t8]

It is true that Google could bundle their services to the front of the queue in favor of other competing services. Hopefully they don't turn out to be as reckless as Microsoft is on Windows.

So far I think Google have been pretty fair and non-biased.

[rcuff]

I don't agree with the Journalism comments. When Google News first came out, it was interesting to see how often news stories were sourced from providers such as the Voice of America (VOA) and Radio Netherlands Worldwide (RNW), international broadcasters that most Americans probably are not aware of. I assert that people were thus exposed to the VOA and RNW that otherwise would have never heard of them. These viewers who then clicked through to the VOA and RNW websites could then browse all the other content those providers had to offer.

Explain to me how this is a bad thing.

[gmiernicki]

There was one error in this article:

>but that's a stopgap to bring old-fashioned e-mail users into the Wave world. Google will run the Wave servers.

Not true, if you listened to the protocol explanation, any company can run their own wave server. In a sense wave servers are just like email servers.

[tecben]

Innovate or die.

[simply7]

Wave will fail, no question. Java in my browser no thanks, I like JS just fine. Anyone used a GWT based web application? They are like Java on the desktop, slow, klunky, etc..

[Bob Thedino]

This is not how GWT works... you code in Java and it gets converted into JavaScript:

"With Google Web Toolkit (GWT), you write your AJAX front-end in the Java programming language which GWT then cross-compiles into optimized JavaScript that automatically works across all major browsers."
From: http://code.google.com/webtoolkit/overview.html

[Maccess]

But Google Chrome doesn't run on Windows 2000, which is widespread throughout the enterprise. For HTML 5 to be widely accepted, and to deny Microsoft an opportunity to go off in a different direction, HTML 5 needs to be supported on Windows 2000.

Enterprise is stuck among windows 2000 and Windows XP platforms as most haven't adopted Vista. Windows 7 offers some hope that Enterprise may drop Windows 2000 in the next round of upgrades, but in the meantime, Windows 2000 is still a significant portion of the installed base, significant enough to cause a veto of a technology if all the users can't have access to it.

[oohmyygood]

Interesting article.

You're absolutely right that Google has contributed hugely to loosen Microsoft's stranglehold on the OS market. But you're wrong when you say thay Apple is facing the same threat. The fact that the OS has become less important represents a HUGE opportunity for Apple. With only 3-4% market share they've got plenty headroom for growth and by providing a superior user experience, Windows users are diffecting to the Mac in droves.

[kenstech_com]

What exactly does "brand loyalty" mean in such a homogeneous market? I can travel the width and breadth of this country and rarely get a news opinion that differs from the orthodoxy. There is a reason 92% of all newspaper editors voted Democrat.

Most of the news papers in this country are like 1500 versions of the old Pravda. So what 'brand' are they protecting? Google may drive a lot of traffic, but it doesn't really centralize news opinion. Today I can get news from all over the planet. I can get news that has a REAL diversity of opinion, not the fatuous leftist dreck served up by the cookie-cutter j-school lackies.

I think that's what pisses off the powers that be in this country more than anything, including the denizens of the 'old media.' All that Gramscian marching through the institutions is coming undone now that people have a real news choice again.

Ken
http://www.kenstech.com

[gmiernicki]

here here!

[Mycroft8]

Great article Rafe, you've hit the nail on the head - Google's raison d'être is to be the gateway to all content on the internet, content which it's pagerank algorithm has commoditized based on views and back links (Google is derived from Page's Stanford project: Backrub, an allusion to its focus on back links). No wonder the Establishment (primarily the old ones like newspapers) is pissed off because no longer is past reputation sufficient to drive traffic to a particular unit of content. It's no wonder that the Google triumvirate (Messers Page, Brin & Schmidt) are so keen to preempt any competition for this gateway positions, be it in social networking (Facebook), microblogging (Twitter), browsers (Firefox), mobile phones (iPhone/Blackberry) or VOIP apps (Skype).

All of Google's strategic decisions can be reverse engineered to this simple objective irrespective of the PR speak about "organizing the worlds content" (which is pretty much a corollary of "you must access all the world's content through our gateway") or "do no evil".

[Kceezy]

On one hand, I am impressed with Google's ability to bring services to people that work very well in comparison to their competition. This is especially impressive when you consider the fact that many of the services are free. Free things that work really well will always be a good thing to me; however, I'm beginning to become very wary of this company and their brand. I think they have the potential to be 10 times the "evil empire" that many claim Microsoft is. The funny thing is people are hyping Google as the Anti-Microsoft, and they are flocking to everything this company drops like abandoned sheep. I think people will find that Google is basically history repeating itself all over again. The same way that people jumped on the Microsoft bandwagon back in the late 80's and early 90's they will find that they are only setting Google up to follow the same course of actions that Microsoft is now vilified for. The only problem is, once Google has an opportunity to really plant their roots in every aspect of our digital lives we will be helpless to do anything about their unswaying and unrivaled power over every branch of the computer industry as well as all of our valuable personal information. I stopped using GMail and Google Calendar about a week ago because of this. Mark my words, this company will have the potential to make Microsoft look like Disney in the upcoming years if people don't stop and take a look at what is happening and what it could lead to. I'm not going to support any one company having this much influence and control over the world economy and, just as important, my information. Here's a better way to word Google's favorite principle: "Don't be evil....yet!"

[sgnb221]

There is nothing wrong with market destruction -at all. It's how free markets work. It's how innovation works.
As several previous comments pointed out before Google entered the technology market development of products was slow or non existent. Now we're seeing better products (free or not) every week. The fact that other companies have been slow to change is their own fault.
While it is true that Google does basically control the keys to the internet the playing field is still wide open. The fact that no company has been able to come up with a better solution is, again, their own fault.