Is it over for Google?
This question is pulsing through most of the conversations I’ve been having with tech and media industry folk these past few weeks. The company’s narrative has shifted dramatically in the wake of Microsoft’s partnership with OpenAI. Nearly everyone I’ve spoken with is convinced the company is in serious trouble – and Wall Street has validated those concerns by trimming $200 billion from the company’s market cap over the past two weeks.
While $200 billion is a lot of money, it’s not clear it matters. In the long view, big tech companies lose and gain hundreds of billions in market cap on a stunningly regular basis. Both Microsoft and Google are trading above where they started this year, and while Microsoft initially saw a bump in its stock price after the beta release of Bing chat, most traders have come to realize that “Sydney” is not ready for prime time – and Microsoft’s stock has settled back to pre-announcement levels. Perhaps Google’s reticence to roll out its own flavor of AI search might have actually been wise.
Regardless, the “Google is f*cked” narrative isn’t going away. Last week’s viral blog post from a former engineer – The Maze Is In The Mouse – offered a deeper proof point as to why (almost one year ago to the date, another post also went viral: Google Search Is Dying). The Valley is subject to several deeply held mythologies – chief among them is the great man theory (Gates, Jobs, Musk, Zuck et al), but a close second is the innovator’s dilemma. This axiom features prominently in most critiques of Google’s current positioning and work culture (I’ve said as much in earlier posts). In short, the innovator’s dilemma describes a company so beholden to its own success that it fails to adapt to market forces which ultimately spell its demise. Kodak, IBM, and Yahoo are just a few examples of former market leaders knee capped by the innovator’s dilemma.
The rise of AI-driven search interfaces present exactly the kind of market forces that could disrupt Google’s core business – and Google’s rushed and harshly judged response to Microsoft’s news seemed to prove the company was mired in a classic innovator’s dilemma.
But that assumption bears examination. Here’s the conventional wisdom: Whether or not Microsoft manages to forge Bing into a world-beating competitor, Google is hemmed in by its current business model, made sclerotic by its conservative corporate culture, and currently dominates a market that is on the precipice of a major shift in user behavior. Let’s break down each:
- Google is hemmed in by its current business model. It’s hard not to agree with this point. Google earned $283 billion in revenues last year, and nearly 60 percent of that was from search advertising. Add in YouTube and Google network partners, and more than 80 percent of Google’s revenue’s are advertising driven in one way or another. But the linchpin remains search – any material decline in search revenue would be impossible for the company to make up in any of its other business lines. This means Google must protect its search revenue at all costs. If consumers shift from “Googling” to “Chatting,” and Google doesn’t have an answer in “Chatting” that can reliably drive profits commensurate with “Googling,” well, that’s very bad for Google’s future. So far no one has ventured a business model for chatting that comes close to the magical profit machine of AdWords. (I’m working on a post on “what the ads will look like” in a chat-based search model, and so far the answers are hypothetical, at best).
- Related, Microsoft and OpenAI are not hemmed in by massive search revenues. This means they can afford to steal search share from Google, while at the same time ignoring any near-term profit goals. Microsoft makes just 5-6 percent of its revenue from search advertising – and can afford to buy market share by adding unprofitable new search use cases like Bing Chat. Google, on the other hand, can ill afford to siphon off its loyal customers to a new product that fails to drive equivalent profits. Can Google innovate their way to finding a profitable new business model? That brings us to the next point worth exploring….
- Google’s conservative corporate culture. In The Mouse and The Maze, former Googler Praveen Seshadri holds nothing back:
Google has 175,000+ capable and well-compensated employees who get very little done quarter over quarter, year over year. Like mice, they are trapped in a maze of approvals, launch processes, legal reviews, performance reviews, exec reviews, documents, meetings, bug reports, triage, OKRs, H1 plans followed by H2 plans, all-hands summits, and inevitable reorgs. The mice are regularly fed their “cheese” (promotions, bonuses, fancy food, fancier perks) and despite many wanting to experience personal satisfaction and impact from their work, the system trains them to quell these inappropriate desires and learn what it actually means to be “Googley” — just don’t rock the boat.
If Google is going to find a business model for chat AI, it’s most definitely going to have to rock the boat – and more likely than not, that will means its core search model will take on an alarming amount of water along the way. As Seshadri points out, forcing meaningful change in a culture as ossified as Google’s requires exceptional leadership and a fair bit of luck, and many have noted that while Google CEO Sundar Pichai is an excellent “peacetime” leader, Google is now at war, and it may need a new captain at the helm. A change like that would be a major shock to the company – but perhaps that’s what it needs.
Then again, it was Pichai that called a “code red” late last year in response to the OpenAI/Microsoft threat, and whether or not you believe Google’s response was bungled, the company has yet to actually show its cards in the consumer AI race. I’d rate this one a “wait and see” – but the clock is ticking. Which brings us to…
- Google dominates a market that is on the precipice of a major shift in user behavior. To me, this is the question – will a significant percentage of Google users shift their behavior to a new interface – and if so, will it even be to an AI-based chatbot? I find this hypothesis to be largely unchallenged in today’s tech conversation, largely because we all wish it to be true. If the first axiom of Valley lore is that of the Great Man, and the second is the Innovator’s Dilemma, then the third has to be some variant on “the Next Big Thing.” The axiom of the Next Big Thing states that something world-changing is always about to break out – and all it takes is one extraordinary company (usually led by a Great Man) to do it. The Valley finds itself in something of a Next Big Thing draught – Web3 didn’t exactly work out, the metaverse has been mostly hot air, and it’s been a decade or more since the heady days of Web 2 apps like Uber, AirBnb, and … my inability to complete the rule of three kind of proves my point. We’re all thirsty for a Next Big Thing story. Presto, along comes ChatGPT. As I wrote earlier, I’m not convinced ChatGPT heralds a sea-change, but I’ll admit it certainly might. And many folks who are far smarter than I are already convinced that an intelligent, chat-based model for accessing and organizing information would be far, far better than today’s command-line search interface. Will it happen? The best answer I can muster is … it might. And in time – possibly a lot longer than we’d like – it likely will.
Given all this, is Google truly in trouble? The company is clearly at its peak in terms of its core search market, and it’s deeply vulnerable to a shift in consumer behavior, should one actually materialize. And yes, it’s frustratingly hemmed into a classic innovator’s dilemma – finding profitable $100 billion markets to replace lost search revenue will be daunting. So far, its efforts have been muted – Google Cloud Platform is a distant third in the race to dominate cloud computing, its “other bets” have yielded paltry results. But Google’s most intractable problem has to be its internal culture – as my friend Rob Reid recently noted to me, seven of the eight Google AI engineers responsible for the transformer paper that sparked ChatGPT’s rise have since left the company. When the best and brightest don’t see a future in the company where they once thrived – well, that’s a real code red.