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Can Google Survive the Internet?

Published: Friday, 14 Jan 2011 | 1:23 PM ET

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By: Gloria McDonough-Taub
CNBC, Senior Editor, Blogs

Guest Author Blog: Can Google Survive the Internet? by William Davidow author of "OVERCONNECTED: The Promise and Threat of the Internet"

The question may seem ridiculous but the answer is not obvious.

First, I should state that I feel that Google is doing a fantastic job of offering inventive and creative new technologies to the market. Second, I should define what I mean by survive. I cannot imagine Google vanishing but I can easily envision their high profit business model getting broken and there invincible position substantially weakening.

The risk is they will become boring.

When most of us look at Google all we can envision is a juggernaut that will continue to expand and live forever. I have trouble seeing anything other than this happening. But if history has a lesson to teach us, it is nothing that good goes on forever or even very long.

OVERCONNECTED: The Promise and Threat of the Internet
When I went to work for the General Electric Computer Department as a young naïve Ph.D. in 1961, I quickly learned that IBM was invincible. One day I discovered that each year IBM spent more on R and D than GE's total sales of computer equipment. When I went to work for Intel, I remember Bob Noyce, the inventor of the integrated circuit and one of the founders of Intel, telling me that one day Intel would provide computers, microprocessors, to IBM and that Intel would become the standard industry architecture. I dismissed the idea because I know that Bob did not understand the computer business. Of course IBM still exists today as a vibrant company but the old IBM only exists in a severely atrophied form.

Just a few years ago, AOL, Yahoo, and eBay were dominant and appeared to be invincible. But in the Internet world things happen at light speed. The dominance of these companies has been broken. Their businesses have gone from vibrant to dull.

So how does all of this apply to Google? Could they possibly have an Achilles Heel? I think the answer is yes. They might be vulnerable to an attack by a new technology that would make search in its current form irrelevant.

But I have a different concern.

When I ran sales and marketing at Intel, I used to teach marketing classes to aspiring sales and marketing employees. One of the topics I discussed was pricing. I used to explain to them that we should price our products based on the value to the customer. When our products were new and unique the value of those products was determined by the opportunities they created for our customers. I would then explain that once those products matured, others would copy them or offer different products that could perform similar functions. At that point the value of Intel's products would be determined by what others charged for their products. If enough alternatives existed in the market then those products would be sold based on their cost to manufacture and if enough capacity and alternatives existed, the price would get uncomfortably close to the manufacturing cost. When that happened in the words of Gordon Moore, another Intel founder, Intel's golden geese would turn to lead ducks.

So here is the challenge Google faces.

The Internet appears to be infinite in size. It has infinite capacity. It used to exist only on devices attached to mainframe computers. Then along came the PC and it will soon reach billions of people on tablets and smart phones. As the Internet has grown so has the number of services—blogs, social networks, shopping sites, games, material to read, etc as well as the number of places to advertise.

"If history is any teacher, they will provide lots of alternative ways to attack Google's Golden Goose.”

William Davidow
Author, Overconnected

Facebook has arisen from nowhere and now has over 500 million users.

These users spend over 700 billion minutes a month on Facebook—on the order of an hour per day. Facebook has teamed with Microsoft on search to make Bing, Microsoft's search engine, more compatible with the social web organized around people. What a great place to advertise! Twitter users now generate on the order of 2 billion tweets per month. In 2009 Microsoft announced a Twitter-search capability that uses retweets and links to other information sources to rank search results . Many of these services cost very little to offer. If history is any teacher, they will provide lots of alternative ways to attack Google's Golden Goose.

The question of critical importance to Google is what will happen to the price of search-based advertising as the number of alternatives grows and advertising options increases?

Google's challenge will be to create enough added value associated with search advertising and new services to blunt the attack. They appear to be doing a very good job of this. But sitting where I sit in Silicon Valley, I listen to lots of new business plans and hear lots of stories from aggressive, smart, and focused entrepreneurs who want a piece of Google's pie. Maybe one or two of them will come up with a big breakthrough that will dethrone Google. Possibly Google will be challenged by thousands of new businesses that will each take a small piece of the market. Or maybe agreements between the big guys—Microsoft, Facebook, Twitter will take a lot of market share. If enough of them succeed, Google's main business, search advertising, will be commoditized. Their value added pricing will collapse. The Google we all know will cease to exist.

Having said all of this, I must admit that I have examined tens of different scenarios and can envision no way this can happen. But having studied the history of business, I can say that I have found very few examples where it hasn't. History is not on Google's side. So the challenge for the smart aggressive employees of Google is to turn history on its head. I personally would bet on history.

Davidow mentions these companies in this Post