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Tuesday, August 08, 2006

Google - Growing Up (and a model for Hedge Funds?)

From Information Arbitrage

Since last Thursday, Google has made three very interesting announcements which highlight what I believe to be the seeds of a master plan: cementing its power as the portal for information discovery on the internet (horizontal domination), while laying the groundwork and providing incentives for those with domain-specific assets (whether in vertical search, proprietary content, etc.) to play with them (vertical participation).

Let me start by saying that the world I see is one in which:

(1) Google gets the most out of its generalized search technology and distribution power through legal, above-board deals with value-added content providers, while
(2) stitching together powerful vertical search capabilities through either stategic alliances or acquisitions.

If successful, what will emerge is a Google that will not only be the dominant portal for generalized search and discovery across the web, but one which will provide much more accurate and relevant search results for those interested in specific areas not well served by generalized search algorithms.

By striking deals with AP and MTV, Google is doing for content distribution what the hedge fund industry should be doing with side-pockets and illiquid asset valuation and compensation - getting out in front of what will only be an increasingly critical PR landscape and re-shaping the dialogue along their own lines. This is pure genius and the benefits of this approach will (hopefully) not be lost among hedge fund managers everywhere.

Content Distribution
Google's deal with AP indicated that they are going to pay something for some manner of content which will serve to complement what currently exists in Google News. Google's deal is certainly notable and potentially has implications for content creators everywhere. While Google bent over backwards to show that this deal in no way went against the "fair use" stance so critical to their business model, it still represents a landmark agreement that will invariably be replicated between the leading news aggregators (like Google News) and a vast array of high-value proprietary content providers.

As noted in Friday's Wall Street Journal:
While Google was quick to emphasize that the specific licensing deal with the Associated Press doesn't affect Google News, the deal appears to have been structured so that it satisfies AP's desire to get paid for its content, and at the same time allows Google to maintain its position with respect to "fair use" of content on Google News.

"Most of the big new superpowers on the Web aren't spending any money on content creation," said Jane Seagrave, vice president of new media markets at AP, "and that's what many of us in the traditional media do best. It's a very powerful partnership if you can get the business model right."

I think Jane is right and highlights the specialized skills and distinct competencies between the creators of content (like AP) and the "new media" distributors of content (like Google News). This historic relationship has long existed between content creators and traditional media, and one only need look in print newspapers to see the references to wire services and other non in-house creators of content which look to traditional media as their distribution vehicle.

As I began writing this post, I only needed to look at the WSJ and New York Times to discover a new Google content deal: the agreement between Google and MTV relating to video clips and the resulting revenue stream to be shared among Google, MTV and the site owners hosting the videos. Today's article in the NYT indicates that Google appears to be focused on the long-term here, giving Viacom the lion's share of the ad revenues in order to illustrate its growing savvy in dealing with content creators:

The deal may also be a sign that Google is getting better at dealing with the producers of news and entertainment, which have sometimes claimed that Google uses their content without appropriate consent and cooperation.
Eric E. Schmidt, Google’s chief executive, said Google would pay a majority of the advertising revenue to Viacom. “The content owners do the work,” Mr. Schmidt said. “Distribution businesses should get a minority” of the advertising revenue, “and the creator should get the majority,” he said.

An executive involved in the deal said Viacom would receive more than two-thirds of the revenue. (The executive spoke on condition of anonymity because the deal terms were confidential.)

By contrast, most of the other companies that are trying to build video advertising networks — including AOL, Brightcove and Revver — are proposing to pay about half of the revenue to the content creator. (Revver, the smallest of them, has agreed to give as much as 70 percent of the revenue to big media companies, said its chief executive, Steven Starr.) Both AOL and Brightcove have other video deals with Viacom and have discussed providing video advertising to it as well, according to executives involved in those negotiations.

Is this a kinder, gentler Google than the one we've seen become a search and advertising behemoth over the past 8 years? No, just a much smarter Google that is looking to feel more comfortable in its own skin as it grows to a size where everything it does will be analyzed and scrutinized to death. Further, continuation of its break-neck growth will also become an issue if it doesn't diversify its revenue bases and build its portfolio of high-value content. What Google doesn't want to have happen is to become another Microsoft, one perceived as a monopolistic, brutal competitor that eventually finds itself on the receiving end of scorn (and litigation) among users, governments and the media.

On Thursday, it was posted on the Google Research blog that Google Research would release of a very powerful set of data (over 1 trillion - yes, trillion - words) and make it available to researchers everywhere. This corpus is particularly relevant for those in the fields of search, statistical text processing and machine language translation. Google Research will make this data available through the Linguistic Data Consortium, so I am assuming they will have a list of those who have requested the 6 DVD "boxed set."

So what of this grand gesture? My guess is that by making this data available, and by knowing which individuals and/or companies have requested this data, that Google will have a line into those doing R&D across areas of interest. This is just so smart. Doing well by doing good, so to speak. If this data helps professors, start-ups, researchers, etc., develop better search and/or translation algorithms and are helped by access to the Google Research data set, it stands to reason that Google would be the logical licensor or acquiror of this intellectual property. Enlightened self-interest is one of the engines of innovation, and Google's actions indicate to me that they have truly internalized this concept.

There is no question that Google has upped its game. The vision and maturity evidenced by these recent actions is impressive. The calculus of balancing meteoric growth and dominance with good citizenship is extremely hard, but Google has shown that they are up to the challenge. Now if only hedge funds could learn from this example.

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