Analysis of IT news

Wednesday, July 23, 2008

When will new Internet giants appear?

Stickiness on the Internet is a controversial subject. The theory is that, because of its nature, Internet users can be very fickle and jump ship at any moment's notice. But in practice users have shown some strong inertia. Yes, they could switch from Google to Microsoft Live, but haven't done so. So how does it really work?

When looking at over 10 years worth of Website evolution a pattern emerges: users will stick to their favorite websites unless a new site provides something really more compelling... or unless the incumbent screws up.

Consider the following examples:

- Street maps: in the late '90s there was several websites offering street map services, MapQuest being the most popular. Then one day Google Maps came along and blasted everyone away. Why? Because it was way beyond what was out there. The map was finally filling up the whole screen, and was much more pleasant to the eye. Last but not least you could drag the map with your mouse. As a result, users switched in drove to Google Maps. Competition such as MapQuest or Microsoft Live has caught up since. Some competing sites even have better street view than Google Maps. But no offer has been compelling enough to convince people to jump ship.

- Social networking: Friendster was the first large social networking site, but it screwed up big time. First of all, the website didn't handle the charge due to its success and ended up alienating its users. Second, because its management was more focused on becoming the next Google than on growing its core service, it missed the rise of MySpace which offered something much more compelling that Friendster: the ability to customize one's profile and add cool images and/or music. Facebook was able to rise because it targeted a public slightly different than MySpace, and because its open platform let users download funny applications.

- Email client: once again Google tried to offer something that was way beyond what was out there. Not only did its Gmail service offer a very slick Web interface, it offered much more email storage than the competition. This was however not enough for Google to steal the show as incumbents had two powerful arguments to lock-in their users: 1) all the archived emails and 2) the email address they were using. This gave them some time to beef up their offers to be on par with Gmail's.

- Web search: in the early days of the Web Yahoo! and AltaVista ruled along with various other lesser known sites (Excite, Lycos, etc.). Then Google arrived and proposed a service that was just better. A simple interface, more pages indexed, a faster and more efficient search. It didn't help that Yahoo! at that time got sidetracked in too many directions (its main page becoming grand bazaar central) and that AltaVista was at a standstill because its parent company, Digital, was in turmoil. Competition like Yahoo! or Microsoft Live has since caught up, but Google still enjoys the #1 spot.

So if you look closely, you will notice that it's mostly new Web technologies that allowed to steal a user base. Google rose to power because of a superior indexing algorithm and because it pioneered the concept of cloud computing. It then overthrew MapQuest because it was a pioneer in terms of Web 2.0 interface using AJAX. The technology used by MySpace wasn't that terrific, but Friendster was so blinded that it didn't see it coming. Facebook used both a new technology (open application platform) and didn't steal that many users from MySpace as it targeted a slightly different audience.

And there are incumbents (some from the Web 1.0 era) who never saw any overwhelmingly better competition: eBay, or YouTube. eBay has the advantage of a strong lock-in (the largest pool of sellers and buyers). Besides, it has yet to be proved that a sleeker interface would provide a better service. or YouTube never saw anybody who proposed something much more compelling than what they have. has always stayed ahead of the curve by constantly innovating, keeping Barnes & Noble website at bay. YouTube, like any other video Website, relied on Adobe Flash for its video capability. And nobody has yet found a better way to display videos. Maybe one day someone will be able to come up with a proprietary technology to display HD video without consuming more bandwidth. In the meantime, YouTube rules as the #1 video site so much that it's a household name.

So the lessons to draw are that:
  1. Brand name is as effective on the Internet as anywhere else. As a matter of fact, this is probably the most powerful competitive advantage incumbents can get on the Internet. Google has become a verb. People commonly refer to "YouTube" or "Facebook" as a category of Website. Users might want to buy stuff from other sites than eBay but might not think of any other site.
  2. New Web giants could appear by coming up with new services. After all, social networking arrived pretty late in the game.
  3. Considering that AJAX and more generally "Web 2.0 technologies" have been used quite extensively by anybody, this means the field has been leveled. So future Web giants are likely to throw out incumbents only by pioneering future Web technologies. This doesn't bode well for Microsoft who is obsessed with "killing Google" (Steve Ballmer's alleged words). Redmond has indeed never been innovative. They've always overthrown incumbents using dirty tricks and relying on Windows. Never with a sleeker technology or an innovative product.
  4. There is also the risk that some incumbents will screw up. Facebook angered some of its users with its "beacon" advertising/spying program. This was not enough to kill its user base, but another scandal might do. Google might lose focus on its core search system. Time will tell...

Shareholders vs. executives vs. employees

After the acquisition talks between Yahoo! and Microsoft fell through, most Yahoo! shareholders were very upset. In an interview, a shareholder was lamenting that Yahoo!'s board didn't care about the shareholders.

I'm sure that employees around the world felt sorry for him. Yahoo!'s board didn't care about him. How unfair! After all, shareholders are notorious for caring about employees. NOT!

At the end of the day, any public company has mostly three types of stakeholder: shareholders, top executives and regular employees. And most of the time the three groups only care about themselves.

Shareholders should logically be the most powerful group. After all, they legally own the company. But if their collective power is strong they are also very dispersed, which strongly dilutes this power. Their biggest power is to hurt top execs stock options when the company's quarterly statements disappoint. But they've proved powerless to stop other corporate abuses.

Top executives are the ones with the most negotiating power. They're in a position of relative power and their small numbers allow them to be focused. In a previous column I argued that there are mostly two types of CEOs: entrepreneurial CEOs and professional CEOs, the latter being preferred by Wall St because they're more polished and play by Wall St rules. But if you think this type of CEOs cares about shareholders, think again. Sure they're more polite towards shareholders and take quarterly objectives much more at heart, but that doesn't mean they give a crap about shareholders - nor that they will please them any better. If you're not convinced, think of all the professional CEOs who've enjoyed a fat, juicy salary as well as a very comfy golden parachute even though their company went through hard times and saw their stock taking a beating. Case in point, Home Depot former CEO Robert Nardelli who was criticized for seeing his pay go up as the stock went down. He was finally kicked out for bad performance but still walked out with a $210 million golden parachute. Or former Disney president Michael Ovitz who received a $140 million severance package after a dismal 16 months performance. That's almost $10 a month golden parachute (and that's on top of regular wages).

And last are the regular employees. Not all only think about themselves, but a lot tend to become disillusioned after the years. They may be told they're "the company's most important asset", but reality doesn't back that noble statement. For a start, employees fall in the "expense" category in a quarterly financial statement, not in the "asset" category. That tells something about how shareholders view them. And as far as how top execs see them, it's interesting to notice how companies tend to part with their so-called "most important assets" when they hit financial trouble. Because they cannot retaliate by awarding themselves nice bonuses, employees tend to be passive aggressive. Slacking on the job, or even embezzlement. But the most common behavior is a complete lack of loyalty. During the doctom bubble companies were complaining that employees were jumping ship too easily and had no loyalty. Well, companies haven't exactly shown much loyalty towards their employees in the last decades either.