Google’s social strategy

It is widely believed that Facebook presents a significant competitive threat to Google. Google itself seems to believe this – Larry Page recently said that all employees would have their bonuses tied to the success of Google’s social strategy.

Why does Facebook present a threat to Google?  A few reasons:

– The utility of Google’s core product – web search – depends on the web remaining fragmented and crawlable.  Facebook has become the primary place web users spend their time and create content, and is mostly closed to Google’s crawlers.

– Facebook controls a large percentage of ad impressions and will likely launch an off-Facebook.com display ad network to compete directly with Google’s display ad business (built from its $3.1B acquisition DoubleClick). It is generally thought that display ads will become a larger portion of online advertising spend (versus direct response text link ads) as more brand advertising moves online.

– There are many other “wildcard” risks – e.g. Facebook competing with Google (and Apple, Paypal etc) in payments, Facebook gaining power on mobile (threatening Android), and the possibility of a greater share of internet intent harvesting happening on Facebook through not-yet-released features like a search and/or shopping engine.

When going after Facebook, Google has at least three key strategic choices to make:

Strategic choice #1: Should Google try to make social networking commoditized or new profit center? (For more about what I mean by this, please see this post on Google’s overall strategy and these posts on “commoditizing the complement” herehere and here).

The advantage of creating a new social networking profit center is obvious: if you win, you make lots of money. The advantage of commoditizing social networking is that although you forgo the potential direct profits, you open up a wider range of pricing and product options. For example:

– When you try to commoditize a product, you can offer a product for free that other companies charge for. This is what Google did with Android vs iOS and Google Apps vs Microsoft Office. Of course, making social networking free to users won’t work since Facebook doesn’t directly charge users (I say “directly” because they make money off advertising & payment commissions, among other ways). However reducing the cost to zero for 3rd-party developers like Zynga who have to pay Facebook large commissions would entice them toward a Google platform (note that, not coincidentally, Google invested $100M in Zynga).

– Interoperate / embrace open standards – Normals don’t care whether a product uses open standards, but by interoperating with other social networks, messaging systems, check-in services, etc., Google could encourage 3rd-party developers to build on their platform. If Google chose, say, RSS for their messaging system, it would already work with tens of thousands of existing tools and websites and would be readily embraced by hackers in the open source community. The web itself (http/html) and email (smtp) are famous examples where the choice to open them unleashed huge waves of innovation and (eventually) killed off closed competitors like AOL.

Strategic choice #2: How should Google tie its new social products into its existing products?

Besides a mountain of cash ($30B net, generating $10B more per year), Google has many existing assets on top of which to build. Google Buzz tried to build off of the “implicit social network” of Gmail contacts, which hasn’t seemed to work so far and raised privacy concerns.

Google’s recent mini-launch of its “+1″ button seems to be good use of the strategy known as “anchoring”. Google is apparently trying to create a federated network where websites embed +1 buttons  the way they embed Facebook’s Like button except the +1 button would be a signal into Google’s organic ranking algorithm (as an aside, this is where Gmail becomes useful as having millions of logged in users makes spamming +1 buttons much harder). Websites care a lot about their Google organic search rankings (which is why, for example, helping websites improve their rankings is multibillion-dollar industry).  A button that improved search rankings would likely get prominent placement by many websites. Making +1 appealing to users is another story.  The user value is much clearer for the Facebook Like and Twitter Tweet buttons – you send the link to your friends/followers. Providing value to users in addition to websites is a good reason for Google to acquire Twitter (something I think is inevitable if Google is serious about social – see below).

Finally, Android and YouTube are intriguing potential anchors for a social strategy. I’ll leave it to smarter people to figure out exactly how, but products with such large footprints always present interesting tie-in opportunities.

Strategic Choice #3: Should Google buy or build?

Historically, it is very rare to see tech companies adjust their “DNA” from within. Google’s best new lines of business over the past few years came through the acquisitions of YouTube and Android. Moreover, these acquisition were unusual in that they were left as semi-independent business units. Facebook’s hold on social is incredibly strong – besides the super-strong network effects of its social graph, Facebook has made itself core infrastructure (e.g. Facebook Connect) throughout the web. If Google really wants to catch up, they’ll need to go back to the strategy they succeeded with in the past of acquiring relevant companies and letting them run as separate business units.

* Disclosure: I’m an investor in a bunch of startups, so you could reasonably argue I’m highly biased here.

SEO is no longer a viable marketing strategy for startups

Many of the today’s most successful informational sites such as Yelp, Wikipedia and TripAdvisor relied heavily on SEO for their initial growth. Their marketing strategy (whether deliberate or not) was roughly: 1) build a community of contributors that created high-quality content, 2) become the definitive place to link to for the topics they covered, 3) rank highly in organic search results.  This led to a virtuous cycle where SEO drew more users, leading to more contributors and more inbound links, leading to more SEO, and so on.  From roughly 2001-2008, SEO was the most effective marketing channel for high-quality informational sites.

I talk to lots of startups and almost none that I know of post-2008 have gained significant traction through SEO (the rare exceptions tend to be focused on content areas that were previously un-monetizable). Google keeps its ranking algorithms secret, but it is widely believed that inbound links are the preeminent ranking factor.  This ends up rewarding sites that are 1) older and have built up years of inbound links 2) willing to engage in aggressive link building, or what is known as black-hat SEO. (It is also very likely that Google rewards sites for the simple fact that they are older. For educated guesses on which factors matter most for SEO, see SEOMoz’s excellent search engine ranking factors survey).

Consider, for example, the extremely lucrative category of hotel searches. Search Google for “Four Seasons New York” and this ad-riddled TripAdvisor page ranks highly:

(TechCrunch had a very good article on the TripAdvisor’s decline in quality).

In contrast, this cleaner and more informative page from the relatively new website Oyster ranks much lower in Google results:

As a result, web users have a worse experience and startups are incentivized to clutter their pages with ads and use aggressive tactics to increase their SEO when they should just be focused on creating great user experiences.

The web economy (ecommerce + advertising) is a multi-hundred billion dollar market.  Much of this revenue comes from traffic that comes from SEO. This has led to a multibillion-dollar SEO industry. Some of the SEO industry is “white hat,” which generally means consultants giving benign advice for making websites search-engine friendly. But there is also a huge industry of black-hat SEO consultants who trade and sell links, along with companies like content farms that promote their own low-quality content through aggressive SEO tactics.

Google seems to be doing everything it can to improve its algorithms so that the best content rises to the top (the recent “panda” update seems to be a step forward). But there are many billions of dollars and tens of thousands of people working to game SEO. And for now, at least, high-quality content seems to be losing. Until that changes, startups – who generally have small teams, small budgets, and the scruples to avoid black-hat tactics – should no longer consider SEO a viable marketing strategy.

The importance of predictability for platform developers

A platform is a technology or product upon which many other technologies or products are built. Some platforms are controlled by a single corporation: e.g. Windows, iOS, and Facebook. Some are controlled by standards committees or groups of companies: e.g. the web (html/http), RSS, and email (smtp).

Platforms succeed when they are 1) financially sustainable, and 2) have a sufficient number of developers that are financially sustainable. Fostering a successful developer community means convincing developers (and, possibly, investors in developers) that the platform is a worthwhile investment of time and money.

Developers who create applications for platforms take on all the usual risks related to launching a new product, but in addition take on platform-specific risks, namely:

  1. Platform decline: the platform will decline or go away entirely.
  2. Subsumption risk: the platform will subsume the functionality of the developer’s application.

The most successful platforms try to mitigate these risks for developers (not just the appearance of these risks). One way to mitigate platform decline risk is to launch the platform after the platform’s core product is already successful, as Facebook did with its app platform and Apple did with its iOS platform. Platforms that are not yet launched or established can use other methods to reassure developers; for example, when Microsoft launched the first Xbox they very publicly announced they would invest $1B in the platform.

To mitigate subsumption risk, the platform should give developers predictability around the platform’s feature roadmap. Platforms can do this explicitly by divulging their product roadmap but more often do it implicitly by demonstrating predictable patterns of feature development. Developers and investors are willing to invest in the iOS platform because – although Apple will take 30% of the revenue – it is highly unlikely that Apple will, say, create games to compete with Angry Birds or news to compete with The New York Times. Similarly, Facebook has thus far stuck to “utility” features and not competed with game makers, dating apps, etc.

Platforms that are controlled by for-profit businesses that don’t yet have established business models have special challenges. These companies are usually in highly experimental modes and therefore probably themselves don’t know their future core features. The best they can do to mitigate developers’ risks are 1) provide as much guidance as possible on future features, and 2) when developer subsumption is necessary, do so in a way that keeps the developer ecosystem financially healthy – for example, by acquiring the subsumed products.

The least risky platforms to develop on are successful open platforms like the web, email, and Linux. These platforms tend to change slowly and have very public development roadmaps. In the rare case where a technology is subsumed by an open platform, it is usually apparent far in advance. For example, Adobe Flash might be subsumed by the canvas element in HTML5, but Adobe had years to see HTML5 approaching and adjust its strategy accordingly. The predictability of open platforms is the main reason that vast amounts of wealth have been created on top of them and investment around them continues unabated.

The interoperability of social networks

Google recently added a caustic warning message when users attempt to export their Google Contacts to Facebook:

Hold on a second. Are you super sure you want to import your contact information for your friends into a service that won’t let you get it out?

Facebook allows users to download their personal information (photos, profile info, etc) but has been fiercely protective of the social graph (you can’t download friends, etc). The downloaded data arrives in a .zip file – hardly a serious attempt to interoperate using modern APIs (update: Facebook employee corrects me/clarifies in comments here). In contrast, Google has taken an aggressively open posture with respect to the social graph, calling Facebook’s policy “data protectionism.”

The economic logic behind these positions is a straightforward application of Metcalf’s law, which states that the value of a network is the square of the number of nodes in the network*.  A corollary to Metcalf’s law is that when two networks connect or interoperate the smaller network benefits more than the larger network does. If network A has 10 users then according to Metcalf’s law its “value” is 100 (10*10).   If network B has 20 users than it’s value is 400 (20*20). If they interoperate, network A gains 400 in value but network B only gains 100 in value. Interoperating is generally good for end users, but assuming the two networks are directly competitive – one’s gain is the other’s loss – the larger network loses.

A similar network interoperability battle happened last decade among Instant Messaging networks. AIM was the dominant network for many years and refused to interoperate with other networks. Google Chat adopted open standards (Jabber) and MSN and Yahoo were much more open to interoperating. Eventually this battle ended in a whimper — AIM never generated much revenue, and capitulated to aggregators and openness.  (Capitulating was probably a big mistake – they had the opportunity to be as financially successful as Skype or Tencent).

Google might very well genuinely believe in openness. But it is also strategically wise for them to be open in layers that are not strategic (mobile OS, social graph, Google docs) while remaining closed in layers that are strategic (search ranking algorithm, virtually all of their advertising services).

When Google releases their long-awaited new social network, Google Me, expect an emphasis on openness. This could create a rich ecosystem around their social platform that could put pressure on Facebook to interoperate. True interoperability would be great for startups, innovation, and – most importantly – end users.

* Metcalf’s law assumes that every node is connected to every node and each connection is equally valuable. Real world networks are normally not like this. In particular, social networks are much more clustered and therefore have somewhere between linear and exponential utility growth with each additional user.

Some thoughts on incumbents

Reposted from Oct 7, 2010 from cdixon.posterous.com

By “incumbents” I mean the big companies that are loosely competitive to your startup.

– The first thing to do is try to understand the incumbent’s strategy.  For example, see my analysis of Google’s strategy.

– Being on an incumbent’s strategic roadmap is a double-edged sword.  On the one hand, they might copy what you build or acquire a competitor.  On the other hand, if you build a valuable asset you could sell your company the acquirer at a “strategic premium.”

– Incumbents that don’t yet have a successful business model (e.g. Twitter) might think they have a strategy, but expect it to change as they figure out their business model.  An incumbent without a successful business model is like a drunk person firing an Uzi around the room.

– Understand the incumbent’s acquisition philosophy. More mature companies like Cisco barely try to do R&D and are happy to acquire startups at high prices.  Incumbents that are immature like Facebook only do “talent acquisitions” which are generally bad outcomes for VC-backed startups (but good for bootstrapped or lightly funded startups). Google is semi-mature, and does a combination of talent and strategic acquisitions.

– Understand the incumbent’s partnership philosophy.  Yahoo and Microsoft are currently very open to partnerships with startups.  Google and Facebook like to either acquire or build internally. If you don’t intend to sell your company, don’t talk seriously about partnerships to incumbents that don’t seriously consider them.

– Every incumbent has M&A people who spend a lot of their time collecting market intelligence. Just because they call you and hint at acquisition doesn’t mean they want to buy you – they are likely just fishing for info. If they really want to buy you, they will aggressively pursue you and make an offer.  As VCs like to say, startups are bought, not sold.

– Try to focus on features/technologies that the incumbents aren’t good at.  Facebook is good at social and social-related (hard-core) technology.  Thus far they’ve kept their features at the “utility level” an haven’t built non-utility features (e.g. games, virtual goods, game mechanics).  Google thus far has been weak at social and Apple has been weak at web services.

– Try to focus on business arrangements that the incumbents aren’t good at.  Facebook and Google only do outbound deals with large companies.  With small companies (e.g. local venues, small publishers) they try to generate business via inbound/self service. Building business relationships that the incumbents don’t have can be a very valuable asset.

– Be careful building on platforms where the incumbent has demonstrated an inconsistent attitude toward developers. Apple rejects apps somewhat arbitrarily and takes a healthy share of revenues, but is generally consistent with app developers.  You can pretty safely predict what they will will allow to flourish. Twitter has been wildly inconsistent and shouldn’t be trusted as a platform.  Facebook has been mostly consistent although recently changed the rules on companies like Zynga with their new payment platform (that said, they generally seem to understand the importance of partners thriving and seem to encourage it).

– Take advantage of incumbents’ entrenched marketing positioning.  The masses think of Twitter as a place to share trivial things like what you had for lunch (even if most power users don’t use it this way) and Facebook as a place to talk to friends.  They are probably stuck with this positioning.  Normals generally think of each website as having one primary use case so if you can carve out a new use case you can distinguish yourself.

– Consider the judo strategy.  When pushed, don’t push back.  When Facebook adds features like check-ins, groups, or likes, consider interoperating with those features and building layers on top of them.