Marketing Memos

“Bottoms up” is not just something you say during cocktail hour or at a strip club. It is a market strategy as well, and Google will implement it with a fist full of dollar bills.

News of a Google netbook operating system – Chrome OS by name – has emerged. Targeted for netbooks running ARM and x86 chips, COS centers Google’s Chrome browser as the interface to the world and to Google applications. This latest Linux distro is designed to address the bottom of the commercial computing market (we’ll ignore the One Laptop per Child gizmos that would otherwise win the Barrel Bottom Scraper Award for underpowered PCs).

Scott McNealy understood half the equation when in an over-caffeinated frenzy said “The network is the computer.” Naturally McNealy saw the hardware side of the system, being that he was in the hardware business. But as any technology marketing maven will maintain, it is the apps that sell the hardware.

Google is all about the apps.

Restate McNealy’s maxim for software and you get “The Internet is the app.” Google search is arguably the most popular app on the Internet. Their desktop applications … not so much, but for low-end users they are plenty.

Low-end users like netbook buyers.

Now that Google apps (Docs, Gmail, Maps, etc.) can operate offline, and given that Google’s browser can be tweaked to enhance these offline apps, Google has all the components for customer lock-in or delight, depending on how un-evil Google really is. Non-power users who want a computer for the most mundane uses – people for who Open Office is overkill – could easily exist using Chrome OS, Chrome Browser and G-apps. This is probably 80% of the market.

I’ll take an 80% segment any day.

The open marketing question is “what hardware vendors would ever use COS?” Industry analysts assess the low end Microsoft tax on netbooks to be about $20 a unit when XP is deployed, or about 7% of the cost of the cheapest netbook available today at CompUSA. $20 may not sound like a lot to you or me because it is a one-time cost. Some industry estimators expect 35 million of the little laptops to be built this year. The Microsoft tax would rack-up nearly three quarters of a billion dollars, which is serious money to hardware vendors or anyone outside of the Obama administration.

Smart money is betting that Google will ask only a nominal, fixed partner fee for joining the COS party. Pay a few grand to gain access and your hardware company is alleviated of the Microsoft tax. Assuming that the brand of operating system is irrelevant to the average netbook buyer, netbook builders are looking at a few extra million dollars a year to pad their 201Ks (which were 401Ks before the recession).

Google’s goal then becomes monetizing the user, not the OS. Tech pundits predict that advertising will be Google’s approach. This may well be. The evil half of my brain (which in full disclosure actually occupies more than half my cranium) sees a million ways of inflicting advertising on unwary netbook buyers. Most methods however are intrusive, unwelcome and exactly what Google will not do. Chrome will not force people to endure Google ad pop-ups, or permanently scrolling banners on the top of the screen (besides, netbook screens are too small to waste on banner space).

Brand and first choice in external interactions is where Google gains, advertising revenues following online. Google is creating a 100% Google environment and a go-to brand. When netbook users wake in the morning, their lives will revolve around the Google OS. Add Google browser, add Google desktop applications, add Google search (built into everything), ad nausium. It is a completely interconnected and Internet driven brand. Microsoft came close to this when indoctrinated info workers adopted Microsoft Office atop a Microsoft OS.

It was Microsoft’s overriding strategy that both gives Google opportunity and may require Google to cede it.

The question is if Google must open the OS in order to compete. For all Microsoft’s faults (a list that is slightly longer than War and Peace and a Hugo Chavez speech combined) it understood that the application sells everything else. The network is the computer, the Internet is the app, the app is everything. When there is a market leading application, Microsoft supports it then clones it. Microsoft has always entertained, encouraged and even funded developers to assure that the next great app – whatever it may be – will be under development somewhere. Microsoft always wants the Next Big Thing to run on Windows first.

If Google closes COS, it will enjoy only limited market penetration. People slightly more advanced than monkeys – anyone who has not created permanent couch indentations – will eventually want to do something on their netbook that Google has not provided. Google’s desktop toolbar is not a digital Darwinian ecosystem. Gadgets are insufficient. Google will open COS in order to expand.

Just don’t expect it in version 1.x. Google knows not to invite unnecessary heat, and will keep COS locked while it matures and takes complete ownership of the low end of the market. After that beachhead is secure, they will open, expand and become a serious threat to Microsoft.

Bookmark to:

In the all business, and especially in technology, there are three ways to grow: you can innovate product, you can change the rules of the game (marketing), or you can buy your way up (cash).

When I see a hyper-competitive company like Microsoft making a multi-billion dollar plays to buy their way up a market, then I know they failed to innovate or market. And that is the condition in which we find Balmer and Company with their mega bid for Yahoo.

We’ll call the merged company-to-be Micro-hoo?

Microsoft — despite making the Internet a consumer product by bolting a TCP/IP stack into Windows long ago — was slow to see that former Sun CEO Scott McNealy was right when he said “The network is the computer.” The Internet is the only infrastructure bigger than what Microsoft had already created. As such it is a glorious place to make some money. But Microsoft was late to the dance, made many of the same mistakes that predecessors made, and never earned the top tier.

Microsoft’s bid to buy Yahoo for a hefty premium shows they still don’t get it.

Let’s stipulate a few things about the Internet before continuing.

• It’s big. “Really big. You just won’t believe how vastly, hugely, mind-bogglingly big it is,” as the late Doug Adams said about a different universe.
• It is changing faster than any company can create, map, or contain it.
• The real money comes not from trying to create content, but by selling advertising on and around it.

Which brings me to Yahoo, MSN, and AOL. Each has in turn tried to be both an Internet search engine and a content aggregation portal, centralizing a set of content and features with the goal of making their portal the first stop and home page for users.

And the users have largely ignored them.

But they have not ignored Google because Google understands the situation. Instead of trying to corral ever-growing content, Google simply helps users navigate it, and make a buck as a byproduct of that basic service. When content is exploding beyond anybody’s control, there is money to be made merely bring some semblance of order from chaos.

Thus, Microsoft’s move is understandable, confounding, and I believe ultimately regrettable.

It is understandable because when you have vaults full of cash, have struggled to achieve a meager third-place in the search business, and risk having the world’s largest money generator (the Internet) default to someone else’s domain, buying your way out of the mess is quick and relatively painless … at least in the sort term. But it is confounding because Yahoo, for all the nifty things they do, are not innovating the basic function of search — and thus the core source of revenue within the Internet as we know it. Google has maintained this focus, and thus has a 57% share of all searches, while Microsoft has a paltry 14% (which is still a damn sight better than Ask, who had to fire their butler after scrapping up a meager 2% of the market).

Google has added non-search entities to their empire, but not with the goal of becoming a content provider, a strategic mistake made by AOL … and we see where that got them. Even in buying YouTube for a seemingly ridiculous price, Google sought not to centralize it within a walled garden of content, but to make its separately branded content searchable and to drive advertising through-and-around it.

Which brings us back to Micro-hoo? and their goals, which are poorly articulated in public. In their press release, Microsoft was clear that advertising dollars were driving the decision, along with the typical mega-merger drivel about economies of scale (that sure worked well for Carly Fiorina right after the Compaq merger, eh?). Microsoft’s purchases last year of advertising exchange and distribution technology companies (AdECN, aQuantive, ScreenTonic) indicates they have a slightly more thought-out scheme than merely merging MSN and Yahoo, and firing redundant staff.

Yet even if we assume that Micro-hoo? loses none of their respective search traffic in the post-merge melee, their total reach would be around 31% of all searches. This will undoubtedly decline as Micro-hoo? attempts to sew together their Frankenstein monster using left over body parts from Yahoo, MSN, and all the recently purchased trafficking and analytics appendages. The merger will disrupt existing services, annoy users who will be told to vacate one of the other mail/IM/portal services, and yet create nothing new. In short, Micro-hoo? adds zero, and all for a mere $41 billion bucks.

Quite a price to pay in order to be the Avis of the Internet.

What will be more interesting perhaps is merger mania among the bottom feeders. AOL and Ask, both struggling to maintain relevance, may just merge in a last-gasp at life (though combined they currently don’t rack-up even 7% of searches). If they do it will be as ugly as a NASCAR pile-up or a presidential election. Hmmmm, maybe we should put all the presidential candidates into high-powered race cars and ….

Is their a marketing lesson in all this? Of course, and that is that you must have product in order to market something thinker than air. Google has product (search) which they constantly enhance and improve, and reap huge stacks of lucre for their efforts. Micro-hoo? won’t have innovation or a superior product, and thus will have nothing exceptional to sell. If your products are weak, then your first strategic marketing task is to determine what better product needs to be created, and then how to get engineering to build it.

Of course, the company that brought us Vista cannot comprehend a lesson this basic.

Bookmark to: