Meritocracy Consulting Blog

For years people have speculated that Google and Microsoft would ultimately faceoff in a death match.

Microsoft has not been taken very seriously in search until recently as they are rumored to be discussing an exclusive deal with News Corp that would leave Google on the sidelines, unable to index name brand websites like the Wall Street Journal.   It’s my belief that this deal will lead to an arms race of exclusive content deals, forcing Google to give back some of their profits each year in the form of payouts to news content providers and presumably content providers of all shapes and sizes.

Additionally, TechCrunch just posted an article explaining how Google’s OS strategy is designed to hit Microsoft where it hurts.  For the past 1-2 years Google has finally admitted publicly that a cash rich Microsoft can ultimately make life difficult for them.  Even if it takes Microsoft dozens of iterations and huge acquisitions, they are likely to eventually be there to keep Google honest in search and with their other products…hopfully.  I think when people look back, the year 2009 will represent a turning point when competition between Google and Microsoft became very direct and aggressive.

With Google diving into operating systems and online hosted office applications, and Microsoft continuing to make acquisitions, deals and improvements in the search space, it looks like each company is now directly pointing a figurative nuclear arsenal at each other, essentially saying, “I will do whatever it takes to hurt your core profit centers…unless you back off”.   Does M.A.D. or Mutually Assured Destruction work between two companies, like it did during the coldwar?

Microsoft through cashback deals has shown a willingness to pay users to search.  If they go through with the exclusive content deals, they would be paying websites to hide their content from Google.  What’s next, paying advertisers to stop advertising?  For Google’s sake, not even Microsoft has that much money.

Of course, Google is not taking these encroachments lying down, in the next year they will have a free competitor to the majority of Microsof’t’s current and future sources of revenue, including a free traditional OS (Chrome OS), a free mobile phone OS (Android), free hosted exchange alternative (Gmail for organizations + Google apps), free sharepoint alternatives (Google Sites), free speech recognition and somewhat advanced calling features (Google Talk) and last but not least free website hosting (App Engine) as an alternative to all of Microsoft’s expensive server solutions.

As a consumer, I hope they keep it up, and I also hope that they try to differentiate a little on factors other than price, such as “who can provide the greatest privacy”, or “who can create the most extensible platforms”.  Is that wishful thinking on my part?

Since the newest addition to the Microsoft nuclear arsenal is the rumored exclusive content licensing deal with News Corp, I should point out that I think the potential Microsoft Bing and News Corp deal would be a total disaster for Microsoft and News Corp, but at least it represents some creative thinking and a willingness to take risks.

Much discussion has now broken out about a potential exclusive news deal between News Corp and Microsoft’s Bing.  I actually wrote this article last week, in response to Jason Calacanis’ post where he and others became really excited bout an evil plot to dismantle Google.

I 100% disagree with anyone who thinks that this deal is good for either Bing or News Corp.  Anything along these lines on the part of Microsoft or News Corp would be short sighted and practically suicidal. News sites have taken a beating because they did not embrace technology once, essentially sitting by watching Craigslist, online media and bloggers undermine/make irrelevant their cash cows.  With the profitable aspects of a news organizations already mastered by OTHER companies online (classifieds by Craigslist, advertising by adsense, Business news by a wide range of sites, etc…), the last thing a news company should do is provide a new financial incentive for someone to replace (through incentivized innovation)…the actual news production.  By trying to exclude content from Google, the financial incentives would start to build for Google to compete with them…one way or another.  Currently, the value add for showing news search results is just to keep the visitor loyally using Google…anyone who posts truly objective news, knows how poorly news stories convert with Google adsense.

Suppose this not-so-genius deal gets done, it is prudent to consider both how Google will respond in the short-term and in the  long term.  I also outline how Google would now have a strong incentive to invest in next generation tools that could replace old fashioned news organizations entirely….in a post titled: Do we really want Google motivated to take on news?

There has to be a better alternative for everyone than going down the road of exclusive search engine partnerships.  I plan to post some details on what these alternatives could be…in the meantime, I welcome your feedback and thoughts.

While this post outlines how much an arms race around exclusive news content licensing would cost Google, I strongly believe that these types of deals will ultimately lead to the final demise of large branded news organizations, like News Corp.  I have made previous posts that cover in detail WHY exclusive deals ultimately will hurt News Corp and Microsoft, so for this brief post, let’s just look at a few numbers.

Let’s suppose Bing and Murdoch do an exclusive deal:

1) As a result of this can of worms, Google might end up with a NEW annual expense of $1B per year to license exclusive content rights from other news providers (so that their search results are inclusive enough).

2) As a result of not having access to ALL indexable data, Google, takes a market share hit on search usage in general, costing them $500 million/year in lost revenue.

3) To provide incentives to smaller news sites, Google increases their adsense payout to top news sites and top YouTube producers…let’s just say another $500 million/year

Note: consider this an estimate that shows a single potential scenario.  These numbers are referenced here, where I talk about  why we might not want Google to have any incentive to take on news anymore than they naturally do by indexing their results.

As I already posted, I believe that a deal allowing Bing to exclusively license News Corp content (at the expense of Google), would be a great strategy for Bing and News Corp to help each other fail!

I describe my general expectations, and then break down Google’s likely response in the short term.

Now to discuss Google’s likely response in the long term…

The short term shenanigans sound interesting for Murdoch and possibly Bing, but as opposed to the short-term sparring, we should expect a more Googly response in the long-term…the heavy of a replacement to old fashioned news organizations, undermining both the business model and the competitiveness of large branded news organizations…like News Corp.  Google’s mantra is that content, whether free or not, should be available anywhere, in whatever way the consumer wants it…this concept makes sense and will ultimately prevail.  Any company that gets in the way of this strategy has to deal with the general user preference for open distribution…and in this case, the massive engineering strength and cash stockpile of Google…who wants to get their hands on all of the world’s content…period.

So if Google has the silver bullet to undermine old media companies (moreso than they already have), why not do it?

The primary reason is that Google does not stand to gain a whole bunch from becoming a full distributor of complete news.  By full distributor, I mean that Google has full access to the entire news story so that they can do whatever they want with it (mostly customize the display, do mashups, manage voting, allow comments, etc…).  This is especially unappealing since news companies don’t want them to be a full distributor…at least not at the licensing prices Google is currently willing to pay.  Google of course is not willing to pay very much since they don’t want to compete with other content providers (who feed the beastly search index daily) and they also know how poorly news pages convert with ads (Google essentially said the same thing, that news is not a big part of their overall revenue).

In previous posts I discuss the rumor and widespread hype around a deal where Bing would exclusively license News Corp content, presumably at the expense of Google.

I generally state  my repulsion to these types of deals, and then outline Google’s response to this exclusive licensing deal in the short term and long term.

Next, I conclude that the financial impact on Google might be roughly $2 billion dollars per year, which of course provides a new, tangible incentive to resolve this problem.

I believe that they ultimately will find a solution that undermines both Bing and News Corp, and in this post I outline what that solution might look like?

First we should ask, what does heavily fund a replacement to old fashioned news organizations mean?

Well, I’m sure Murdoch would hope that it means that Google would chase them into their domain of expertise (sourcing news, analyzing news in realtime and producing live broadcasts/coverage, etc…).  This is a mere hope, Google knows that they can’t cross that chasm for a wide range of reasons…and they don’t want to…the margins are too low.  So, “funding a replacement” means that Google would provide massive incentives and open software platforms that empower smaller news organizations…and pay them just enough to want to do it professionally, but not enough to get big to destroy them .  Note that a study recently came out showing that the average blogger makes $40-70k.  The “invisible hand” that determines how many bloggers can afford to source news and write about it is noone other than Google.  With the stroke of their magic adsense wand they could increase or decrease the number of bloggers just by adjusting their payout percentage…including adding financial incentives for organization’s that report the news how they want it.

To be clear, I do NOT think that Google has much interest in what the news is, they just want access to index the “best news in the eyes of their users”…they don’t want their users getting better access somewhere else.  When I said that Google will provide incentives to encourage smaller organization’s to produce news exactly “how they want it”, I simply am describing how Google will use incentives for content creators to use their formats, do proper tagging, produce higher quality, etc…

To summarize, I believe that Google is capable of solving the problem that news providers do not make enough money (of course as a news provider, this is the exact problem that Murdoch wants solved).  If Google is involved in the creation of a true solution to making news online profitable, does Murdoch believe that Google will strive to create a solution that leaves a place for him at the table?

It would appear that as far as online news goes, Murdoch is nearly desperate, willing to try radical changes with the hopes of getting people to pay for the news.  Currently Google is not working to solve this problem and therefore Murdoch is left to do something on his own…or suck it up, because:

1) Currently, the incentive for Google to “solve” Murdoch’s problem is very small, close to $0…

2) If a MSFT (aka Bing)-Murdoch deal was done, the value for Google to “solve” this exact same problem  would immediately increase by the amount of money that Google ends up spending to get their own exclusive or non-exclusive content deals

3) Also, the value of taking down Murdoch and his newly demonstrated exclusive dealing nature would increase by the perceived value (by Google) of any lost search traffic as a result of these shady deals, or possibly even reduced market share as people try out “Bing”.

If Murdoch is entirely undermined by Google when Google is hardly trying to undermine their business, imagine how ugly things may get if news organization’s launch a preemptive strike.

The above analysis shows how Bing and News Corp would catalyze three new incentives for Google to address this problem head on with both a strong short term and long termresponse….now let’s look at some specific numbers.

As a multi part blog post, I outline my belief that a deal allowing Bing to exclusively license News Corp content (at the expense of Google), would be a great strategy for Bing and News Corp to help each other fail!

I describe my general objections to this rumored deal, and then discuss both the likely short term and long term response by Google.

In the short term…

If Google responds as I expect them to, they will just start doing deals with other exclusive news providers.  They have lot’s of cash, more traffic to offer publishers and a full ad hosting and analytics package that rivals anything that Microsoft can offer.  Microsoft can go head to head with Google on bribing…I mean licensing content from…news organizations, but do they really want to?  Microsoft is already subsidizing their mobile strategy, their search strategy, the web strategy as both a portal and as a cloud computing platform…how many more business units do they want to have to “invest” in, instead of generating a profit (like they fortunately do with Windows, Office and Server software).

Consumers in the short term…

I would be remiss to not discuss how consumers might respond.  I expect that they will either not care and just keep searching as usual (not missing News Corps content at all), or become so fed up with content requiring multiple search engines that they will no  longer use search to discover news…but rather use twitter, an xml reader or something that is better suited for finding news anyway.  This consumer reaction might ultimately accomplish what Murdoch wants (to extort money from from search engines since it is easier than getting consumers to pay), but does anyone believe that Google will just sit on the sidelines paying extortion fees or watching the process for news discovery to transition to other technology platforms?  If consumers start utilizing new tools to consume the news, is there any chance that Google won’t be actively creating/improving/buying existing  aggregation tools, or empowering developers to create them on top of existing Google products? (like Desktop search, android, Chrome, etc…).

Next, check out Google’s potential long term response to an exclusive deal between News Corp and Bing.