Looking back at the Google Doubleclick combo
Look at the stars of the web. At the beginning was Yahoo (the reinvention of yellow pages), then eBay (the perfect e-commerce business), then Google (the ultimate company :-)), then MySpace/YouTube/Facebook (the first wave of destructive reinvention of the web).
Google was the perfect business in many ways. It’s probably the first web2 company, since it is being fed by your intelligence and usage. Its economic path is fantastically efficient. Where eBay was the first perfect "zero gravity" model, it is fundamentally limited by the number of participants on the exchange (it grows linearly to the number of participants). Yahoo has good operational leverage as it scales better than linearly with the number of users — but it really only scales at one end (the network of users). [Most of these thoughts are remnants of spending time on BubbleGeneration a couple of years ago.]
Google blew through this and grew on a strongly exponential curve (see graph from BubbleGen). It effectively scaled at both ends (production and usage) and prompted WSJ’s Alan Murray to write these great words: "the Google economy is a kind of high tech feudal system: the peasants produce the content, Google makes the profits". No wonder they bought YouTube :-)
Then comes DoubleClick. Isn’t it ironic that in the seminal Sep-05 article of Tim O’Reilly, the #1 "Web 2 by example" pair was indeed Doublelick / Google AdSense. The seminal web 1 advertising business has now been bought by its highly scalable search brethren.
When eBay bought Skype for pocket money, I was so intrigued (or baffled) that I took the trouble to listen to a few of Meg Whitman’s analyst calls. I heard her unable to articulate a clear vision but pounding the table about delivering 20% growth to the market. My interpretation: eBay was a business destined to be run for cash at some point (when you are the market, you cannot grow faster than the market). The chance of a massive rerating was so enormous that she was forced into making a spectacular acquisition that was vaguely synergistic with PayPal to keep delivering the dream, and iterate her message to the market. Skype is fantastic, but it’s also being reorganised drastically in Europe to refocus on short-term revenue generation (although that may have something to do with the earnout…).
Google / Doubleclick clearly does not fall into this category. After all, consider this simple fact: Google can now go to a large site and offer them the full service of advertising and effectively become the one-stop shop media sales. Adwords / IAB / In-video, PPC / CPM / CPA, they do it all (TV and mobile coming soon). Now that’s pretty powerful. We saw their video ad offering and it’s just amazing. And of course they’re also hampering Microsoft.
Nevertheless, 2007 is I think a seminal year for Google. Like eBay owns auctions, they own search (in Europe they represent 80% of the market). They are on (in my view) slightly insane multiples. They are growing into a very large business where being godly with product is not sufficient anymore. They are dealing with M&A integration issues, with internationalisation of their teams, with a growing number of product lines. Recently they had to go through the European organisation and effectively start building some kind of organigram, give people titles, rework their employment contracts. I think gravity is getting to them.
Adding a more traditional growth model business like DoubleClick (I hear Kevin Ryan lambasting me from here about lack of vision — he might be right, he has built a damn impressive CDN / monetisation player) indicates in my opinion a shift to the mainstream that will make it harder for Google to maintain the revenue growth it has enjoyed so far. When you start to worry about crosselling / upselling into your customer base, it usually means you are starting to optimise a maturing business. Add TV (say Spotrunner) and mobile (say AdMob) to the marketing mix put everything on an AdSense paradigm, and maturity promises to be profitable !! [By the way, the FT for once completely misses the plot in this incredible article, worth a read, through Clickz] + [Also read this].
I should really disclaim this post by saying that I am poorly placed to comment on two US companies on which I have no insight (which is why you don’t read me doing much Techcrunch-aping). But I really think Google, whilst it is pursuing a highly coherent strategy, is going to have trouble meeting the growth expectations placed on them by the market. I wonder if they will accept the rerating, keep surprising me with fantastic acquisitions such as YouTube or Doubleclik, or succumb to more arcane strategies like the folks at eBay.