Playing Among Giants

Earlier today a friend asked what my thoughts were about starting a small online business during a recession. While I was thinking about it, I came up with a larger question, which is, why would anyone start an online business these days? With Google branching out more than ever, it's impossible to become involved in something that they aren't currently involved in or haven't thought of. In fact, a lot of Venture Capitalists commonly ask, "Well, what if Google decides to do 'X'?"

I think there are a lot of ways to answer that question, and the proper way to answer it obviously depends on the product in question. Google is a large company with almost a limitless reach to money and talent. Competing with them on any level is going to be difficult and will take a lot of hard work and money.

Obviously, Google's core product, search (and with it, search advertising) has allowed it to dominate the web. One thing Google has done wrong is expand past their core product offering. By necessity to survive, Google expanded from search (and advertising) to mobile, email, web analytics and more recently video and social networking. Because of this they have become a company that is a 'jack of all trades, master of one'.

So how do you compete with Google? The simple answer would be to find their weakness and exploit it (obviously this is oversimplifying it, but bear with me). In social networking, Orkut has never been big in the United States? Google was not first to market with social networking. It launched in 2004 well after known sites like Friendster and MySpace were dominating. Google knew it could provide a competitive product because of all the people already using Google Search on a daily basis, and all of the information they had access to. Regardless, Facebook launched after Orkut and clearly blew it away.

Another example is video. Google Video and YouTube launched roughly at the same time (for the sake of argument, YouTube may have launched a bit before Google Video). Video on the web was an instant success. With people beginning to have more access to broadband web speeds, the demand for video was growing. Not only that but the product that YouTube built was functionally better than Google Video. The end result was Google purchasing YouTube for $1.6 Billion.

So when one asks "Well, what if Google decides to do 'X'?", the way to answer that question is to say that Google has grown too big to properly develop and execute the strategy that is necessary in the development of the product. The next step in answering that question is to define why Google's product will never be as good as your product.

Thoughts on a Google/Yahoo Search Deal

TechCrunch posted the following article about Google serving ads against Yahoo search results. Everybody seems to have their own opinion about the pros and cons of such a deal. Microsoft will obviously be pushing the Department of Justice to take a nice and steady look at possible monopolistic overtones to the deal.

Because of Google's mammoth ownership of the search advertising market, it's easy to see why anyone inside of Google or Yahoo would be in favor of it. Google is currently spinning the issue saying that the partnership will lower ad prices Really? How? It will essentially direct advertisers to a network that (after the deal is completed) will own upwards of 90% of the search advertising market, taking away competition, and by definition force the price of keywords and keyword phrases up.

The problem with not just search advertising but online ad networks as a whole is the lack of quality competitors in the space. Granted, there are now over 300 ad networks competing for a piece of the $16billion online ad market. The trouble is not one of them has shown the capability or the determination to produce a product capable of effectively competing with Google.

Unfortunately, a good product is only half the battle. Many companies out there have developed good ad networks, it's just that a) the management is under-prepared for a long fight with Google, b) the product they built can't scale, or c) the company lacks the discipline or the expertise to successfully execute putting another product in play with mainstream advertisers.

The Bloodletting, Part II

I was really hoping that I wouldn't have to post more thoughts on the financial markets recent stumble, but it's too important not to at least post a few random thoughts.

- The Fed decided to bailout troubled insurer AIG last night. While I'm against the government bailing out bad management, this one was needed. AIG wrote credit default swaps and sold them to banks who bought bad mortgages from mortgage companies. Their 'promise' was that in the event of default, AIG (the world's largest insurer, well, it was, anyway) would be good to pay back the bad loan. Lo and behold, bad loans start rolling in, and the piper demands to be paid. AIG sold these derivatives pretty much unregulated, to anyone and everyone that would buy them. Suffice to say, if the Fed didn't step in, the bloodletting would be a lot worse.

- Lots of debate as to whether or not the FOMC should lower short-term rates. Assuming the market opens dramatically lower tomorrow, I don't see this as implausible.

- Word on the street is puts for Goldman Sachs went from around $.15 to over $20 in the space of two hours. No photographic proof of this, but I don't see this as too illogical, given that it's one of two independent banks left standing.

- I overheard something a bit concerning while walking through the Financial district of San Francisco today, two well dressed men standing in front of the Mandarin Oriental whispering into their mobile phones about 'manipulation'. Then, about an hour later, a commentator on CNBC mentions the same word.

- The SEC released an emergency order today preventing naked short selling. Not sure if this isn't too late.

- Both WaMu and Morgan Stanley are seeking their own respective deals to take them out of their bad positions.

The Bloodletting

Today was obviously not a good day for anyone who is apart of this country's financial system in any way. From those employed to oversee it, to those who work for it, and finally (and probably most importantly) those who invest it. With the DJIA dropping more than 500 points, it was the worst day since just after the September 11th attacks.

I actually think that today's bloodletting was a good thing, not only for the stock market, but for the economy as a whole. Over the weekend, a couple of major things happened, first, Bank of America purchased Merrill Lynch, and the Federal Reserve decided they were not going to bailout Lehman Brothers.

Let's be clear, it's never a good thing when banks the size of Lehman and Merrill simply go away. People lose jobs and insane amounts of money. But the decision of the Fed not to bailout Lehman (and inconsequentially, they probably telegraphed the same signal to Merrill) is a sign that they think the economy may be on the mend.

Let's face it, back in March when the government bailed out Bear Stearns, nobody had any sort of accurate clue about how deep or severe the current housing crisis would be. This weekend's decision not to help Lehman, is a clear signal that the government thinks the financial community and the economy as a whole is strong enough to withstand a major investment bank going out of business. 6 months ago, this just wasn't the case.

I'm no finance expert, but I think it's safe to assume that there might be more banks that go under in the next 6 to 12 months. The important thing to remember is that the responsibility for these defaults is not the general public's, but that of the banks themselves, who got themselves in this mess to begin with.

Quick Update

So I've been away, obviously, but hope to update this more regularly based on the fact that I finally invested in a personalized domain. I'll be tweaking the colors, layout, and may even change the name of the blog itself in the coming days and weeks. Here's to more content!