GOOG Results, Ouch (It Was the Taxes)

I’ve done just a quick scan, and have taken a look at the after market trading (GOOG down 6% already since the bell, UPDATE now 12%), and the quarter doesn’t appear to have delivered on what the street wanted.

From my read, GOOG fell well short of EPS estimates (their GAAP $1.22/share, non-GAPP was $1.54, street was expecting $1.77 or so), and growth from Q3 was pretty shallow (relative to the seasonal blowout that I expect investors wanted and expected, given the share price).

This is not to say GOOG is going down the drain, or a bad company. It’s clearly the healthiest, best, most important Internet company right now. But it does seem to confirm my earlier suspicions they were worried about their growth, and that it wasn’t strong enough to meet the market’s incredible expectations given the share price.

I’ll tune into the conference call for kicks, this should make the folks over at Yahoo! feel a little better…

UPDATE: Listening into the call, and looking more closely at the results table (nice q-over-q presentation here) it’s clear that a whopper tax hit that they didn’t seem to foresee was the culprit behind non-GAAP EPS being off the mark by at almost $.20/share. But even without the tax hit, it’s clear that revenues and earnings would only have met, not exceeded, expectations, and that was not going to be enough to keep the stock flying in the mid-400s, with a P/E of over 90.

Overall, pretty positive presentation from the Google folks. Eric Schmidt and the CFO spent a lot of time talking about potential for the international market to fuel growth in the business. Having spent some time running an international consumer internet business (to be fair, one much, much, much smaller than Google’s) I, too, am bullish about growth.

But I’m not sure they should place too much faith there; they are already at 38% of total revenues for the int’l side, Google in Europe already has fantastic market share and can’t grow too much more, and there are many secular reasons why internet advertising is likely to remain smaller outside the United States for a while. After all, in “traditional media,” about half of all advertising spending is in the United States, mainly because so much of the worldwide consumer demand for products and services comes from United States consumers…

In the long term, Google is right to be bullish, but I think it will be a longer, harder slog than they are admitting.

It will be interesting, all-in-all, to see how the market digests all this news, that the tax hit was responsible for so much of the miss, but the fact too that they would just barely have met expectations even without the additional taxes, which in and of itself would have been a miss and a disappointment.

China, GYM, and Stephen Colbert

How do I lump these three things together? Truthiness. Let me explain.

I’ve been trying to figure out where I stand on Google’s entry into China (and have written about similar dilemnas and my personal experience in China here and here). My initial gut instinct was that Google was wrong to do this, particularly in light of their “do no evil” aspirations. But I found the very adult commentary from both Doc Searls and Dr. Weinberberger (whose writings I admire but neither of whom I know personally) on this topic compelling. So I thought about it some more.

Their position is also advanced today by Bill Gates.

The essential argument from Searls, Weinberger, Gates and probably Sergey Brin is this: the world is a messy place, we are continually faced with difficult moral dilemnas for which there are rarely perfectly moral answers, and on balance engagement with China is better than the alternatives. More specifically, both Gates and Brin would probably argue this particular form of engagement is likely to increase, not decrease, the amount and scope of information available to Chinese internet users.

But then there is this. The reality does not meet the rhetoric or our hopes. If you are in China, you still can’t search about Falun Gong, Tiannamen Square, Tibet or Taiwan with any hope of really getting something that is objectively close to the truth. Nor can you expect to write about those subjects truthfully. The government simply won’t allow that to happen. Indeed, Google, Yahoo! and MSN have all complied with the Chinese government’s request to ensure that you can’t do this. And other folks like Cisco have worked hard to help them built the Great Wall in case those guys don’t filter things out.

Which leads us to truthiness. With these types of bargains with folks like MSN, Yahoo and Google, the Chinese government can continue to argue and proclaim they are “liberalizing” and inreasing the openness of their society. And Yahoo!, Google and MSN can argue that they are not doing something immoral, or wrong, but that instead that they’re helping to open up China and Chinese society by “engaging.” They all — the Chinese government and GYM –
get to engage in some truthiness. The appeal and logic of “engagement”
seems and feels true — so long as you ignore the reality and the facts. The facts are that GYM are providing services and technology that help the Chinese government
restrict and repress free speech, especially political speech. Which makes this example of truthiness that much more delicious — because they all essentially argue that by abetting in repression in the short-term they’ll liberate in the long-run!

The world is complex and full of moral mixed outcomes, but there must remain things we won’t do — even for vast sums of money. As I’ve asked before, what would we make of now of IBM arguing that their engagement with Nazi Germany in the 1930s was proper? In this particular case, I am increasingly of the opinion that GYM and Cisco have crossed the line. But like Searls and Weinberger, I could be wrong.

GOOG Earnings Chatter

Amr Awadallah’s post today asking whether GOOG will miss its Q405 earnings targets, picked up by Battelle and others, is very interesting.

Twice in the last three months or so, I’ve posted in the same vein, albeit with much less specificity, prompted by the heavy promotion of the toolbar, and the default-on insertion of ads for the Google Clips feature in the Google Reader (admittedly, the second being a minor, minor issue in terms of traffic and thus money).

All of this atypical — and “UnGoogly” — behavior amounts to one of two things:  that they’re worried about maintaining expected levels of growth; or that they’re dead set on cranking out as much revenue per page, damn the “Do No Evil” mantra.

I continue to think that the worry is focused on the middle quarters of 2006, based on projected trendlines and the market’s expectations for growth to justify the whopper P/E. My gut tells me we’ll see another stellar quarterly report from Google for Q405, but that their pronouncements about the coming year will be the most interesting to parse.

Felten on Google Video

Ed Felten has an excellent post about the privacy implications of Google Video’s DRM solution. Very much worth a read. His conclusion echoes a point I made several months ago on my typepad blog about the Google flirting with disaster with their web accelerator product.

As Felten points out, the flaunting of privacy concerns probably isn’t intentional or deliberate. More likely, just hubris. I’ve seen that movie before.

DOJ v. Google, Why Is This Bothering Me?

Yesterday on this blog, I speculated that perhaps Google’s resistance to the DOJ subpoenas might produce market forces that create a virtuous cycle, where all of the major portals and search engines would try to outdo one another to demonstrate loyalty to us, the users, in opposing Big Brother-like snooping.

Reading through the materials more carefully, especially the letter from Google’s attorney (echoed by Battelle’s reaction and analysis), it would seem Google’s resistance is less predicated on principle and more on protection of proprietary information for competitive reasons. (Oops, I should have had my cyncicism barometer dialed up). And now I wonder whether market forces and actions will actually lead to the opposite end than the one I described.

In order to ensure they appear less trustworthy, will folks like Yahoo! and MSN and others try to soothe us with comfortable rhetoric, telling us no “privacy” rights are at stake, all the while giving up information to the government without a fight? One can see this spin already happening, to a degree. Just read yesterday’s Search Engine Watch play-by-play relaying the comments of Yahoo and MSN folks:

In fairness to Yahoo, which handed over information –
and MSN which likely did the same — it is important to note that it is not just
spin that no privacy issues were involved with this particular data. As I
explained in the story, the information is completely divorced from any
personally identifiable data.

Let me especially stress this. Want 1 million random web sites? There’s no
privacy issue in that. The government didn’t ask for the “bad” sites or sites
that were linked with any particular activity. They just wanted a list of sites,
probably so they could do a survey.

It’s a stupid request, of course. It’s sort of like the government asking a major car
dealership to give you a list of random license plate numbers rather than the Department Of Motor Vehicles. Surely the
government can generate its own list without forcing a private company to do
this.

How about those search requests? They are a list of searches with no user
data associated with them. If that’s a user privacy issue, then live displays
such as listed
here are a long-standing one.

Here’s a better example. Infospace — which owns the Dogpile meta search
engine — has sold raw search data to
Wordtracker for years. I have never heard of anyone concerned about the
privacy implications in that. This is because there aren’t any. You can’t see
who did a search, IP addresses, cookies, etc. It’s just a big long list of
words.

That all sounds so reasonable, but the more I thought about it the more it troubled me. I *get* that asking for aggregated queries without personally identifiable information doesn’t violate anyone’s individual privacy. But isn’t the government’s request for this information insidious? The DOJ wants to know what we’re searching for in order to restrict us from searching for those things. Doesn’t that bother you?

I keep trying to think up analogies or hypotheticals that would illustrate the moral risk more clearly. Here’s one:

Imagine a small town in, say, Utah where the city council passes a law restricting minors from getting access to books about homosexual sex practices in libraries or bookstores. Someone challenges the law, claiming among other things that minors rarely if ever check out these books. Lawyers for the city, to prove otherwise, subpoena all of library records for a 3 month period, plus purchase records from both online and brick-and-mortar bookstores serving the town’s citizenry, to show how often such books are checked-out or purchased, but with protections to ensure no personal information is associated with the data.

That kind of effort by a government body, to get access to information about information we collectively want and consume precisely in order to restrict consumption of certain materials would trouble me. Hugely. Which is why there has been such discussion about the Patriot Act with regard to library records.

Smarter, better informed minds than mine will parse this all more carefully I hope. But, I think the essential issue at stake is the government’s attempts to gain information about the information we consume, with the further intent to restrict or regulate the information we consume. That’s a bad thing, plain and simple.

Corporations as Rights Guarantors?

Interesting discussion all over the web today about the Government’s anti-pornography crusade and related demand for information from Google by the DOJ.

Further, interesting speculation on Search Engine Watch that MSN and Yahoo complied, at least to a limited extent, with the government’s request.

I think Google’s position is commendable. Their non-compliance will only bolster their “good Google” image. Conversely, it’s possible that if people pay attention to this and it turns into a bigger issue, MSN and Yahoo! will suffer in the minds of some consumers — even though it appears they released no “personal” information.

Both Yahoo and MSN are already tainted, in that they have collaborated with the Chinese government’s efforts to repress political speech. This latest incident reinforces the impression that they’d not put up much of a fight with any government when it comes to information they may have about us users, both in the collective and individual sense.

Ironically, maybe eventually interestingly, this could create a competitive dynamic that is helpful. If Google is consistent in its apparent protection of its users, it should consistently gain loyalty from us (that, of course, requires a big and as of yet unproven assumption: that we collectively actually care about our rights). If Yahoo! and MSN continue to suffer by comparison, they may do more. One way to highlight their efforts will be to pick high profile, important fights with various governments to protect their users rights.

Newspapers, and some other media companies, have long done this, both to advance reportorial privileges, but also because they know it’s good marketing. When they fight government subpoenas, they look like they’re fighting for the little guy, against the big bad government. (One could argue that at least that used to be the case, with respect to things like the Pentagon Papers).

In this age of increasingly bold uses of executive power, including admitted wiretapping and monitoring of US citizens conversations without a warrant and in defiance of the law, could corporations like Google, Yahoo!, and MSN end up being a key wall of protection against unwanted and unwarranted attempts to snoop on us? All incented by competition to be the best “protector” of our online rights?

It’s frightening that it could come to this. I’m glad to see corporations act righteously, as Google appears to have done here. But I don’t want to have to rely on the power of market forces and profit incentives to secure our fundamental constitutional rights.

Technorati Tags: Politics, Internet, Spying

Apple vs. Comcast vs. Player-to-be-named-later

On Halloween, I expressed some skepticism over on my old blog about Apple hitting the million-videos-sold mark, and how meaningful that was.

Today, Apple announced (among many other things) that they had sold 8 million videos.

I admit error, and that Apple is doing somewhat better than I would have guessed. I was expecting a more linear, sampling phenomenon, and announcement of between 5-6 million videos sold by the opening of MacWorld. Having played with the video-enabled iPods since Halloween, I can better appreciate the appeal in certain specific scenarios, for certain content. Consistent with Apple’s success in music, the video iPod without a doubt provides the best overall consumer experience of any portable digital video device.

I’ll also note, and admit for the record, my previous skepticism was probably driven by my direct, personal experience with the push for mobile video while at Real, by good smart folks inside the company as well as cheerleaders outside. They kept telling me just how huge it was all going to be — in 2002, in 2003, in 2004, in 2005. I’m still waiting. I was wrong to conflate the mobile video business with what Apple was trying to do with the iPod. It’s an altogether much, much, much more compelling experience (the iPod).

But now that I’ve admitted error, let’s really step back, do the math, and put this all in context. Because once we do that, I think we’ll find the growth is not yet that terribly stunning. All of the folks out there running the digital media businesses at “old media” companies like Viacom/CBS, Disney, News Corp, the sports leagues and the movie studios need to do some pencil sharpening and calculator work before they stake their companies’ futures on a distribution deal with Apple for the iPod. I’ll take my bait and do a little of the math for them.

First, consider the run rate for the Apple video sales. The key denominator to look at is installed base of video-enabled iPods. Apple didn’t say today exactly how many video iPods they’ve sold to date, but they did announce 14 million units moved during the last three months. Let’s assume that 40% of those were video enabled (the lower denominator actually helps the hypefest case, so I’m picking that to make the argument more fair). That would be 4.8M video iPods.  If that estimate is right, that would mean each video iPod owner purchased an average of 1.67 videos over the three month period, less than one video purchase per month per iPod owner. Dangerously close to sampling behavior (meaning, get the video ipod and buy a video for it) and much further away than the addictiveness they have going with the iTunes store. Trend that out in 2006, with optimistic scenarios for continued video iPod sales, and you don’t end up with a huge industry.

Contrast this with what is happening with Comcast digital cable users and VOD. Comcast told analysts (ed., link to Comcast investor PDF) at the Citigroup Media conference this week that in December 2005, there were 140 million VOD “views” by their digital cable consumers. I can’t totally nail down Comcast’s total number of digital cable homes, but based on another presentation (another comcast pdf) they made last fall, I think it’s about 9.5 million (add up the digital cable subscribers on slide 5). That’s an average of 14.7 views per digital cable subscriber per month, or 44 every three months, some twenty-six times the rate of consumption of paid-for iPod videos.

Now, some might step in here and note that a significant number of those VOD streams offered by Comcast are “free” as part of the cable plan. Well, that’s true if you remember that these folks are paying on average $60-80/month for their digital cable service (almost half pay over $100/month). Further, that perception of “freeness” (despite the monstrous monthly charges for cable) actually helps to make my point, in that consumers with digital cable who really like VOD will find more value in the Comcast VOD offering than the $1.99 or $2.99 per video price that iTunes and Apple are pushing, and a better experience (unless you really want or need the content to be portable). Consumers will feel like they are getting the VOD programming as part of their cable or satellite service, and unless they’re willing to disconnect their box totally, and get their video programming only through the Internet or traditional broadcast or Netflix or some combination thereof, they’d be right.  (The math: If the digital cable add-on expense works out to about  $10-15/month, the average cost per VOD is around a dollar given average usage. Of course, Comcast would remind us that digital cable subs get other benefits, too).

The more that consumers rely on things like Comcast VOD (or similar services from DirecTV, or other cable cos and telcos), the less time and money and interest they’ll have in services from Apple, Google, Yahoo or others. The big question is whether services like those from Comcast end up being “just good enough” — enough programming, at a fair enough price — to capture the marginal dollars and time consumers are willing to put towards more video programming. For now, the answer seems to be: yes.

To sum up, it is doubtful the current strategies of Apple or Google will persuade most customers to abandon these “good enough” services from Comcast and others anytime soon (I know, this runs counter to the conventional wisdom that Comcast and their ilk are dead). If the Internet is going to be the next platform, the challenge will have to come from a player-to-be-named later. Yahoo? Skype/eBay? Someone else?

When Bad Product Trumps Good Strategy

I like reading Umair Haque’s blog occasionally, and find much of his thinking provocative.

I suspect this analysis is wrong, though:

Glancing at TechDirt, I see response to Google Video is mixed. Interesting.

Though the product may suck, the strategy is still dominant: leveraging cheap coordination to utilize a market to allocate resources more efficiently than TV stations, Hollywood, etc, can.

At the same time, if you’re worrying about DRM…don’t. This is the real test of DRM. Google’s market, if it’s efficient, should show the DRMafia that the marginal cost is far (far) greater than the marginal benefit.

See, the problem is that “dominant strategies” in the abstract don’t matter when products outright suck, and the products don’t solve real world consumer problems.  Because the market — in this case, the market of consumers — ultimately ignores and discards the product, despite the fact it might be powered by a clever, well-thought through economic and business strategy.

Consumers will ignore the current Google product because it fails to understand what they (consumers) want: content that is portable to another device (preferably an iPod or a TV) coupled with a large catalog of programming that they can’t get through cable, satellite. Google’s use of DRM cuts them off from satisfying this consumer need, media companies in the main will gravitate to a DRM solution as long as one is offered, and so I fear (and would bet) we won’t get that market efficiency test Umair wants. Plus, to repeat, you don’t even get to the test stage where the market decides what is efficient, or isn’t when they don’t use the product at all because it stinks.

What is ironic about Google Video is that Google’s heritage is first and foremost as a great product company — their search won because it offered more relevant results, from more pages, with far greater speed and less clutter, than anyone else. They then coupled their great product several years later with a great, first class business strategy with Adsense and Adwords. Seems to me they have inverted the model with Google video, by starting perhaps with a sound strategy, but without a very good or serviceable product in place.

(Conversely, inferior strategies coupled with great consumer experience and product can sometimes trump dominant strategies — iPod and iTunes, instoppable for the foreseable future, are surely Exhibit A for this argument. Microsoft, on paper, probably had a better market efficiency model, but consumers just don’t care because the end-consumer experience is not as compelling as Apple’s. Maybe that will change this year as Umair and others argue).

I would guess we won’t see Google’s dominant strategy trumping, say, Apple iTunes’ video plans anytime soon.

Google Video Loses the Plot

First: I have to caveat everything I write here because I haven’t been able to look at or use Google Video yet. That the service was announced, but not launched, is in and of itself lame.

Second, based on what I’ve been able to learn about Google video, it would seem they have not really done anything useful. Instead, they appear to have picked a strategy that adds to the tower of Babel that is the downloadable video internet marketplace today.

What should they have done? Simple, same video marketplace idea, but without a DRM solution. Give us paid-for content, but in a more-or-less standard wrapper — MPEG4 or the H.264 flavor, that works on the largest variety of devices and that can be burned to DVD without restriction.

I would guess Google will argue that they are doing that (the Charlie Rose example that has been cited), but that they’re also want to offer media companies and producers a choice between that approach or some form of DRM distribution. Indeed, here is their pitch:

Owners also have the choice to offer their content with
or without copy protection – enabling them greater control over its
distribution.

Sure, it sound sensible and logical. But, by giving this choice they’ve made a real mistake, because they have forfeited the market-making impact they could have had, and their opportunity to build a video marketplace that actually provides consumers a decent experience. Most media companies and producers offering paid-for content will choose to have their content copy-protected, and unless I’m missing something, that copy protection probably won’t work with a significant range of devices (and I doubt it will provide for DVD-burning, so sneakernet won’t be an option, either).

So what Google has ended up with is a second-rate (at best) initial content offering and a third-class consumer experience. With a little bravery, they could have focused on a first-rate consumer experience — and a solution without DRM is the only consumer-friendly option for now. Combining first class consumer experience with their market-making traffic would have made Google a real threat. Indeed, with that combination, they would need just one success — one — to get the ball rolling. One example of a video selling 1 million, 2 million, or 3 million copies, and they’d have folks beating down their door. And without a connected device strategy (like Apple), it would be a lot easier to sell that many copies of a video if it could be burned to DVD; or copied to a Tivo; or to an iPod.

PS: my support for a non-DRM solution isn’t borne out of some anti-copyright agenda. It’s just a practical view, outlined here.

Why DRM Won’t Work for Video

There was a time, during my final years at Real (say, 2001-2003) I thought there was a chance DRM for video could work.

I don’t anymore.

I believe that the only way to create a durable, winning service for paid-for video delivered over the Internet is without DRM. I don’t take this position because I think copyright is inherently bad — that’s a more complex issue for a later time, and besides I’m undecided on that point — but because of practical considerations.

The main practical consideration is that DRM will work only if it is easy for consumers, and that in turn will happen only if there is a single-approach that works for nearly all of the content on most of the devices. That has been the key to why the VHS and DVD were successful. It is highly unlikely to happen with digital video delivered over the Internet because it would require either (a) coordination among a significant number of companies not likely to work together, or (b) one or two companies to establish a DRM standard by significant control of the marketplace (and only Apple appears like the might be able to do that as of now).

Neither of these scenarios is likely with Internet video because there are:

1. Lot’s of device makers
Arguably, this has been the case with the consumer electronics industry for a long time, and yet they’ve managed to herd the cats and get support for agreed-upon standards, DVD being the best example of that approach. But the list is even bigger here. Not only do you have the traditional television component constituencies, you also have mobile phone industry, the PC industry, chip-makers, game boxes makers, pvrs, portable devices kings, and many others all wanting a piece of the action. Getting them to agree is unlikely, and because the stakes are so high and the competitors are so numerous, it is equally unlikely that one or two will gain some type of hegemony over the others. Only Apple appears to have a chance, and it would be the equivalent of shooting the moon if they pulled this off with video (see below on why they’ve succeeded with music).

2. Lot’s of service operators
Folks like Yahoo, MSN, Google, Apple, and maybe eBay or Amazon or Real all will offer video services over the Internet, not to mention the large media companies like NewsCorp, Disney, TimeWarner; or “delivery” companies like the traditional telcos, the cablecos, satellite operators, or the mobile phone operators. Indeed, MySpace just announced today a video download services. None are so powerful to be able to dictate a standard, and doing so would require collaboration with some alliance of device makers. Microsoft has essentially been trying this approach for the past six years with Windows Media and it’s associated DRM, allied with PC makers and various device makers. Apple has kicked their ass by having a better, more integrated consumer experience with some degree of openness. If MSFT couldn’t pull it off at the height of their power, and it’s deep reach into 90% of the desktops out there, how will a consortium of theses companies get enough traction to make a single approach work?

3. Lot’s of content producers
Video is not music. The field of play is altogether different, and the biggest difference is the absolute range in both kind and number of video makers, owners and producers.

Apple (and Real and Napster and fifty others) created more or less complete, compelling catalogs of music for sale or rent by licensing 2-3 million songs in deals with essentially four partners (Universal, EMI, Warner, SonyBMG). No one company, not even the most powerful company, will be able to do that in video or even get close. There are too many producers and owners of video content, ranging in type from the big mega-media conglomerates (Viacom, NBC Universal, Disney, NewsCorp among them) to individual film-makers, artists and individuals.

The only chance of success is to get a significant majority of these producers to gravitate organically towards a single proprietary DRM. The only company that appears to even have a chance of doing that now is Apple; clearly, their hope is to get enough momentum so that success begets success, that more and more video owners distribute through their system to their devices, and that over time they achieve a position of hegemony.

While they are off to a good start, and could shoot the moon, there are too many powerful competitors with too much to lose standing in their way. Not just Microsoft. Or Google. Or Yahoo. Or Sony. But Comcast (already selling way more VODs than Apple is video for the iPod). And DirecTV/Sky/Newscorp. And any number of other folks with a real or quasi- distribution platform at risk.

So Apple will get stuck with a subset of wanted and desirable content, with a subset of consumer experiences (will they ever get DVD burning for video, for example?). And as consumers we’ll have the Balkans; a mess of warring and incompatible video DRMs and content offerings to wade through, which in turn depresses both the availability and demand for content through these services. And plays into the hands of folks like Comcast, DirecTV, Sky and others who will do just enough to satisfy most of the people most of the time.

So, the only way out of this mess is rallying around good standard codecs and formats that work on most devices, most machines, most of the time. The device makers and the service operators (except maybe Apple, or Microsoft) can be brought around, as they would gain. It’s the content owners and producers who are most scared of this approach. They have been scared into believing (by themselves, each other, and DRM proponents) that delivering content in MP3, MPEG, or h.264 without DRM will result in piracy. Conveniently forgetting that piracy is already occurring.

The only way to bring the content owners around is to give them proof. Show them an example of a video selling a couple million copies, available say in h.264, without DRM, and with not much piracy. I think this is possible, and would have happened with music except that the stores were forced by the labels to use some form of DRM. So we never got to see what might have happened.

The sad thing about Google’s announcement Friday is that they could have been the company to push this approach. They didn’t, so maybe Yahoo! or someone else will. Indeed, there are worse ways Yahoo! could employ their burgeoning LA staff than to evangelize the merits of video without DRM…