The end of Web 1.0 and the challenge ahead for Google

The Yahoo showdown with Carl Icahn is only two weeks away. Today, Yahoo got some great news that Legg Mason, which owns 4 percent of the company, will back Yahoo over Icahn. I may yet have to eat crow over my prediction that Icahn would win a shareholder vote. On the other hand, the folks at Legg Mason and I agreed on one point: Both sides should settle this before shareholder’s vote in August 1. In a statement, Bill Miller, chairman and chief investment officer of Legg Mason Capital Management, said:

“We would prefer that the company and Mr. Icahn reach a mutual agreement on the composition of the Board and end this disruptive proxy contest.”

But no matter what happens over these next couple of weeks, I’ve come to believe that the Yahoo ordeal is part of a larger story playing out across Silicon Valley. In 2008, we’re seeing the end of Web 1.0 as several first-generation Web companies are either collapsing, or beginning to wheeze heavily.

I’m thinking not only of Yahoo, but also CNET, which was bought by CBS following an ugly shareholder fight, and eBay, which while still profitable, has begun to show its age as shown by the reaction to its recent earnings:

“Analyst Tim Boyd of American Technology Research took a harsher view. He said the company was “milking more and more out of less and less” and questions the growth potential.

“Growth on the site is slipping; it’s a company that’s mature and stagnant,” said Boyd, adding that other e-commerce sites such as Google and Amazon are “cleaning eBay’s clock” in terms of sales. The auction site’s international reach, too, is spotty, he said, particularly in Asia.”

Each of these companies have shared a central problem. Having been innovative once, they’ve been unable to do it again. This is, after all, the hardest thing even for the best of companies to do: Change the world more than once.

The question now is whether Google can buck this trend. Especially now that it is beginning to show some cracks:

Shares of the company tumbled 8 percent to below $500, as Wall Street has come to count on Google to deliver revenue and earnings surprises over and above expectations each quarter.”It’s hard to love the numbers,” said Colin Gillis, analyst at Canaccord Adams. “There’s the initial shock of this being the best company in the space and it just fell short.”

By the way, we could argue forever about whether Google is Web 1.0 or 2.0. It was started in 1999, but didn’t really take off until a few years later. So it’s kind of a middle child. But personally, I tend to see Google, with its IPO in 2004, as the father of the Web 2.0 generation.

In any case, there is a tendency to ascribe all sorts of wonderful characteristics to Google. The way some people talk, you’d think that Google had figured out how to bottle innovation and sell it. Famously, the company lets employees spend one day a week working on side projects. And it likes to point to this as the way of number of new products were born, including things like Google News.

But the problem is that except for search, I don’t see the big innovations. Most of the other things it’s trotted out are really me-too versions of other things created by other companies. Some of these are much improved (maps, Google docs) and some not so much (Google talk, Google reader).

And then there is the big albatross: YouTube. As the Wall Street Journal reported last week:

“World-wide revenue from YouTube ads has fallen short of Google’s expectations this year, and is likely to total about $200 million for the full year, according to two people familiar with the matter.

YouTube is critical to Google’s campaign to extend its advertising reach far beyond text ads tied to Web searches, its revenue powerhouse. Google wants to sell more video ads and display ads on YouTube and elsewhere. It also wants to crack the television, radio and newspaper ad markets. Its target: the 90% of global ad dollars that don’t currently flow to the Internet.”

Not totally shocking. After all, is anyone making money on Internet video at this point? But Google’s innovative DNA was supposed to solve problems like this. It hasn’t. And in fact, they’re in as much disarray as everyone else.

Let’s also not forget that even in the world of advertising, Google has mainly cornered one large and very lucrative piece: matching text ads to search results. But it’s still trying to make a dent in display advertising, an area where Yahoo remains much stronger.

John Battelle, a long-time Google watcher, notes that the point where a company achieves near dominance in one area is the point at which it can often go off the rails:

“If I were at Google, I’d be more than a bit worried. Why? Because once you’ve vanquished your competition, then what?”

When Google went public back in 2004, it structured its stock into two tiers so it could retain more control over its destiny. It also said it wouldn’t be offering guidance on its earnings. Both moves were born of a laudable desire to be able take a longer-term view of it’s company than Wall Street typically allows.

Now we’ll see whether Google can keep its eyes fixed on the horizon, rather than on crossing the next street. And more importantly, whether Google will deliver any more true innovations that will continue its run as the Web’s dominant company.


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