The Microsofting of Google
Why two companies ought to surf drunkensailors.com.
BY HOLMAN W. JENKINS JR.
Wednesday, October 17, 2007 12:01 a.m. EDT
That Microsoft is leading the lobbying charge against Google's pending acquisition of DoubleClick is ironic for a lot of reasons, particularly this:
"It is difficult to imagine that in an open society such as this one with multiple information sources, a single company could seize sufficient control of information transmission so as to constitute a threat to the underpinnings of a free society. But such a scenario is a realistic (and perhaps probable) outcome."
Those words come from a famous 1995 brief by an imaginative Silicon Valley attorney that kicked off the Microsoft antitrust wars. Though the dread forecast today is the same, the bogeyman has changed. Now it's Google.
First, some industrial history: Early man invented the wheel but only later did his life become colorful and interesting with the invention of advertising-supported media. His crowning achievements were the big three TV networks, ABC, NBC and CBS. TV, a prophet explained, is a "brand awareness" medium.
Then along came the Internet and Google, whose business model is a recapitulation of network TVs, but even more powerful thanks to the digital possibility of tailoring these messages to each specific viewer. When all ads are digital and depend on detailed information about individual consumers for their effectiveness, the devil theory goes, all advertising will migrate to the Google platform, and all publishers will depend on Google for their livelihood.
But such hysterics have shed whatever naive paranoia they had when Microsoft was the target. Today, it's just the biggest of businesses, and the most Guccied of lobbyists, playing the old game of sandbag-your-competitor in Washington. In its day, Microsoft's ownership of Windows, the universal PC operating system, at least presented a real antitrust conundrum. Not so, Google.
Google's search engine enjoys 65% market share, but for reasons more of sticky habit than any structural advantage. One search engine is pretty much like another as far as users are concerned (though Google would naturally beg to differ). Not only do rivals like Microsoft, Yahoo and Ask.com collect sizeable traffic, but startup capital has been pouring into new search outfits like PowerSet, Hakia and Wiki Search.
DoubleClick is no monopolist either. Two rivals in its business of serving up targeted advertising to Web sites were recently acquired by Yahoo and Microsoft. A third, ValueClick, is the subject daily of takeover rumors. Powerful players clearly are positioning themselves to give Google-DoubleClick a run for their money.
What Google and Microsoft do have in common could be called the curse of network effects, namely network costs.
Microsoft continues to pour billions into Windows, adding features most users don't know exist, while spending millions of man-hours to remain "backward compatible" with thousands of aging programs and devices used by ever shrinking numbers of customers.
Google, for its part, spends billions to refine its search engine while adding acres and acres of servers to catalog the world's ever widening surplus of ever less-interesting Web pages.
Combined with DoubleClick, Google could create an ever more compendious record of what users do on the Web. But even given the declining cost of storage, would this mountain really yield commensurate value in helping the company target users with ads they might respond to? Probably not. The devil theory depends on the likely mistaken idea that collecting and storing information on Web users has increasing, rather than diminishing, returns.
The two companies are similar in another way. Like Microsoft, Google has shown a Howard Hughes-like propensity to throw money in every direction in a quest to secure its privileged existence.
In Microsoft's case, think Xbox, the Zune music player, MSNBC, the MSN Internet service, as well as countless startup acquisitions that disappeared into the Redmond maw never to be heard from again. Lately Microsoft has decided the Web business of the future is advertising. Hence the $6 billion aQuantive acquisition.
Google bought YouTube for $1.65 billion and claims one day it will make money from advertising, but for now it bears the rapidly increasing cost of storing and serving billions of videos most of which are watched by nobody. Google has courted similar unrequited expenses to bring users free business software, email, WiFi, a forthcoming telephone, a bruited national wireless network, all in theory to be supported by ad revenues.
A law of nature that leads to fruitless spending? No, a law of corporate governance. With founders entrenched in a controlling position, such companies don't see their luck for what it is and channel their winnings to shareholders. Instead they squander their abnormal returns hoping to make lightning strike again, and end up with a collection of low- or no-return businesses to show for their trouble.
Google's founders are guilty of one error that Bill Gates did not commit, throwing around the word "evil" in a callow, unimpressive way. Google's share price recently passed $600. Microsoft's once rose to a great height until its growth prospects were marked down in line with the utility-like cash flows of the Windows franchise. This too may be a portent for Google.
Mr. Jenkins is a member of The Wall Street Journal's editorial board. His column appears in the Journal on Wednesdays.
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