Friday, February 28, 2003

Evil Google

I've been tangentially watching Dave Winer (of Userland) and Evan Williams (of Blogger) going round and round on what Google's acquisition of Blogger means. (Full disclosure: I use Google and love it, I use BloggerPro and like it, I tried UserLand and did not like it).

Here's something I recently learned in school: venture capitalists hate to go up against Mom-and-Pop businesses. They hate it because Mom-and-Pop businesses are tough as nails, and will refuse to exit a market long after purely financial companies have pulled the plug. That's not to say venture backed companies won't swing at Mom-and-Pop dominated business sectors (eg. Staples) but it makes them nervous and afraid.

The reason Mom-and-Pop businesses are so tenacious has to do with the standard operating decision all firms have to make. If you are making an economic profit by selling above marginal cost and covering your fixed costs, you stay in business. If your price drops and you are only just barely covering your marginal cost and aren't covering your fixed costs any more -- you still stay in business because your upfront costs are now sunk. Getting into the business turned out to be a bad decision, but now that you're in it, leaving would be an even worse decision. In fact, companies do not exit until their operational value falls beneath their salvage value (the firm's next best value), and often that can become very low. In very stagnant industries with declining prices (old steel mills) it is common to see no new investment, money losing operations, but only gradually contraction. This is because a money losing plant, for a while, remains a better choice than closing the plant down.

Mom-and-Pop businesses are so tough because their salvage value is really low. If your family has run a florist shop for generations, what are you going to do if you close that shop down? All you know is how to run a florists. The next best option for people deeply tied to their family business is usually pretty grim, so they will hang in there long after strict business ventures have closed up shop. Venture funded companies are strict business ventures, so they compete with these guys very cautiously.

I don't know much about Dave, but I've been reading him less than I used to. I am have no idea if he feels jealous towards Blogger because Blogger is more famous than UserLand, although UserLand may have been there first. I don't care. And while I admire his enthusiasm about pushing technology forward (at least his own kind of technology), his seeming disdain for profit making would make me, as an investor, very leery about giving him money. Entrepreneurs walk a hard line -- they need to belive in their company to make it through the tough times, but they also need to remain clear eyed about the business and its performance. The point of business is to make money. Investors and employees can then take that money and spend it on all the indulgences and philanthropic causes they like.

Dave is free to think of his business as a Mom-and-Pop shop or whatever, but investors won't think of it as a business at all because it's not, it's a lifestyle choice. People are free to make whatever lifestyle choices they want, they just gotta pay for them. But I don't know if this matters at all to Dave since he has a gig at Harvard these days. Good for him.

Regarding Google's "evilness":

1) They've taken out a patent on search, and I ask "what took them so long". My memory may be playing tricks on me, but hasn't Google been the target of patent-infringement lawsuits by no-name search firms? The awful truth is that if you can patent algorithms, companies must patent algorithms, if only to protect themselves from extortion. This is all dead weight loss waste, and makes a travesty of the US Patent office.

2) Google is also beefing up their advertising. To be honest, the only online ads I've ever found useful are the sponsored links associated with Google searches.

3) I find claims that Google is a flagrant freeloader ripe coming from someone who uses Google without paying for it, and benefits from Google helping others find his site, also without compensating them for it. I'm sure these claims are sincere, but they also reveal something myopic about people's appraisal of their situations. Update Martin writes in, pointing out that his "freeloader" comment was a dramatic overstatement. So Martin does not think google freeloads, but points it out as a strain of thought.

4) I'm also unafraid of what Google plans to do in the future. Kottke's analysis of Google's real assets is very good, and I'm not sure if the paranoia I'm reading into it is real, or just projected since I found the article via a very pessimistic Dave Winer. Last I checked, it was easy to put up a website. If the quality of Google's search results starts to deteriorate, anyone can come in and offer better search. Oh, the joys of competition.


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