Free-for-All Could Pay Off for Google
A new version of Picasa, Google Inc.’s digital photo software, is due for release today, offering additional ways to edit, print and share pictures.
It also has a feature that Web surfers have come to expect from Google: It’s free.
Google acquired the company behind Picasa in July and immediately slashed the price of its software from $30 to nothing. When Picasa co-founder Lars Perkins asked Google executives how the software would make money, he recalled, they told him, “Don’t worry about it.”
In fact, Google has eliminated or slashed the price of every service it has acquired, including Web log software Blogger and online mapping program Keyhole. And many of the services its own engineers created feature no ads or subscriptions; these include social-networking software, a program for conducting queries through text messaging on cellphones, and services for searching through computer hard drives, scholarly material and university websites.
A publicly traded company not charging for or placing ads on many of its services may seem nuts. But people who watch the company closely say there could be method to the madness.
One theory is that Google is throwing out a swarm of ideas and hoping one will become its next billion-dollar business. After all, Google co-founders Sergey Brin and Larry Page created the search engine as Stanford University graduate students and attracted millions of users before deciding to sell advertisements to run alongside search results.
Those ads have turned Google into one of the Internet’s most profitable companies. The Mountain View, Calif.-based firm posted a profit of $106 million on sales of $1.5 billion in 2003. Its 2004 sales are expected to double and its profit to triple when Google reports earnings Feb. 1.
Now, said Mark Mahaney, an analyst with investment firm American Technology Research, the Internet giant seems to be taking a “Field of Dreams” approach: Build it, and they will come -- Google will worry about how to cash in later.
“With almost every other company, I would say that’s unnerving,” he said. “But I guess they’ve got enough of a revenue and profit engine now that that’s excusable.”
Other observers see a master scheme to funnel Web surfers to Google’s advertising-supported services and build loyalty to its search engine, which faces fierce competition from the likes of Yahoo Inc. and Microsoft Corp.
For example, the new version of Picasa makes it easy to send photos through Google’s Web-based e-mail program, Gmail, and to post pictures on Blogger’s Web journals. Both incorporate advertising.
And when Picasa users print a photo with the latest version of the software, they will see a button that takes them to Froogle, Google’s online store, for ink cartridges and other printer supplies.
Picasa didn’t have the luxury of giving away its software when it was part of Idealab, the high-tech incubator in Pasadena that initially funded the photo services company. To Idealab Chief Executive Bill Gross, Picasa seems like one piece in Google’s grand plan to house people’s e-mail, photos and other digital files in addition to launching their Web searches.
“I think Google wants to be the place where you store your life,” he said.
“What they’re doing is brilliant. They are using each of their services to promote their other services very well.”
Google reminds Gross of how Microsoft used the enormous profit from its Windows operating system to give away its Internet Explorer Web browser a decade ago. That move not only helped Microsoft become the dominant browser provider but also let it install its MSN website as the initial home page and its Windows Media Player as the initial online jukebox for millions of Internet users.
Mahaney, the American Technology Research analyst, expressed some concern that Google was losing sight of what investors most want: profit.
“I hope they’re not being blind about monetization and profitability,” he said. “This company is such a black box it’s hard to know.”
Google executives dismissed such concerns. They say their early bet on a search engine that had no immediate promise of financial return paid off, and they are willing to invest time and money in other useful products even if no business model is apparent right away.
“We’re a profitable company,” said Alan Eustace, a vice president of engineering. “We can afford to try things that might delight our users.”
The company may add advertising to some products. With others, another approach to making money might become apparent. And some ideas will never make a dime, but Google executives claim not to mind.
“We care about our shareholders and maximizing value,” Eustace said. “But our company would make very poor decisions if we looked at everything through the lens of making money.”
In paperwork for the initial public offering that raised $1.45 billion for the company, Google made clear its intentions to fund risky projects in search of the next billion-dollar business -- and to forgo some profit to bring useful services to the world for free.
“Do not be surprised if we place smaller bets in areas that seem very speculative or even strange,” Page and Brin wrote in an unusual letter accompanying their IPO. “As the ratio of reward to risk increases, we will accept projects further outside our normal areas, especially when the initial investment is small.”
That’s mighty enticing for creative computer programmers looking for work, said Jordan Rohan, an Internet analyst with investment bank RBC Capital Markets. Google has replaced Microsoft as the most attractive place for geeks to work, he said, thanks in part to its reputation as a company where engineers can develop products without necessarily having to worry about how they will fatten the wallets of executives and shareholders.
That suggests yet another rationale for the company’s strategy: The more smart people Google recruits, the better its chances of hatching the next world-changing technology.
“You and I could debate whether Picasa makes money today or in three years, but at the end of the day it’s irrelevant [as long as] Google continues to attract the best and brightest in the industry,” said Rohan, who ranks Google as his top stock pick.
“I’d rather bet on the best and brightest.”
Google’s ability to create services becomes increasingly important as the competition surrounding search engines tightens. Yahoo, Microsoft and Ask Jeeves Inc. are narrowing the gap when it comes to user loyalty, according to a report released last week by research firm Keynote Systems Inc.
“Can you drive loyalty to search engines through other services?” asked Bonny Brown, Keynote’s director of research and public services. “It’s what a lot of these search engines have on their mind.”
