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Technology Stocks : GOOGLE (NasdaqNM:GOOG)
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From: Bennitto1/7/2006 9:09:50 PM
   of 20
January 5, 2006
A Commercial Runs Through It
Google's Grand Plan to Take Over TV Advertising
By Robert X. Cringely

My 2006 predictions column has to be delayed until next week, not because I have no predictions, but because there is so much speculation and mis-information swirling around about Google and the Consumer Electronics Show that I feel it is important to print the column I had planned for next week right now. So look for my annual predictions column in this space next week.

Google's Larry Page is making a keynote address this week at the Consumer Electronics Show, and some folks have been speculating that Google will announce a $200 PC, a deal with Wal-Mart, or even the Google Cubes I wrote about a few weeks ago. Frankly, I don't know what Google plans to announce, but I'll take a risk and say it is unlikely to be a $200 PC or a Cube, and I can't even imagine what they'd announce with Wal-Mart. This is risk-taking on my part because this column lingers for a week, half of which will be AFTER the Google keynote, so many of you reading this will already know what I don't.

Google would be crazy to announce a $200 PC. Profit margins are bad enough in the PC business, but in the $200 PC business they are even worse. Google, as a public company, can't afford to kill its gross profit margins by entering such a business in any credible way. I say "credible" because Google may well announce that it is giving more money to the MIT Media Lab's $100 notebook PC project, for example, but that's philanthropy, not business. So much for the $200 PC.

They MIGHT announce the Google Cube, I suppose, but I seriously doubt that puppy is anywhere near ready to ship, so if they do announce, it is strictly to do so before some other company. I now know of two other companies -- one a dot-com and the other a telco -- that are planning to introduce cubes of their own, so some preemption might be in order, but I still tend to doubt it.

A lot of this week's speculation seems to rise from an unsourced L.A. Times article and from a Bear Stearns research note, both of which mentioned me. I stand by what I have written, but I can't write what I don't know, so we'll all just have to wait and see what happens.

There is plenty of room, though, for rumination about what's coming and why. That's the rest of this column, which attempts to look into the minds of Brin, Page, and Schmidt, and figure out where the heck Google is actually going.

Google's inscrutability has served them well. The company gets lots of attention because it introduces lots of products and services, none of them pre-announced and most of them different from what came before. They aren't afraid to try new things, and having tried them, also aren't afraid to shut them down if they don't seem to be working as intended. All of this is by design.

Google has turned beta code into a weapon, creating "beta" programs that in the case of Gmail had more than three million testers signed-up before it went from beta to production. A beta test is a wonderful thing because it can be ended with a whimper but not with a lawsuit. Betas for Google are sometimes real statements of product direction and sometimes not, but Google competitors have no way of knowing which is which until they, too, have devoted resources to competing with something that may have no long-term existence. The greatest impact of Gmail, for example, was on HotMail and Yahoo Mail, forcing them to dramatically increase their cost structures to keep users from fleeing for Gmail's greater storage allowance.

To understand what Google really means, however, I keep coming back to the core values of the company -- search and advertising. What does each new product or service do for search or advertising? Because until they come up with a third revenue source as big as those two, Google will always be looking for its livelihood in those two directions.

Does that mean Google isn't serious about getting into video distribution? No. Google has been talking to every TV network including one where I work, so I have to assume that they are serious about video distribution. But that doesn't have to mean that Google is planning to kill television as we have come to know it over the last 50-plus years. On the contrary, for all its interest in video distribution, I think Google sees a lot of its future in helping existing players in the TV business to make even more money. That's a prime use for those shipping container data centers and Google cubes.

I have to admit in this next bit that I didn't come up with all these ideas on my own. That's what super-smart friends are for. However, I'll gladly take credit for them if they turn out to be correct.

Google is an advertising company. Their edge is granularity. No one uses Google AdWords to push toilet paper because everybody uses TP. But if you want to sell custom Warlock capes or hand-machined shifters for discontinued Studebakers, Google can charge advertisers a huge premium (per prospect) because these customers are too expensive to find any other way.

So what are the data center trailers for? Well, right now, everyone in the country watching "American Idol" sees the identical commercials at the same time, except for two ads at every half-hour mark, which are inserted by the local station. So the state-of-the-art in TV ad granularity is buying only a million people, instead of a hundred million. This is how it's been done since David Sarnoff cobbled together the first radio network. It's very primitive, but no one's really noticed since TV advertising is still incredibly profitable. And it's profitable despite the fact that VIRTUALLY EVERY TV AD IS WASTED ON PEOPLE WHO AREN'T REAL PROSPECTS. The entire programming chain is profitable DESPITE the fact that practically the entire audience is freeloading.

How often do you see an ad on TV for something you're currently in the market for? I'm guessing almost never. But imagine if everyone watching "American Idol" only saw ads for things they might really buy? Or, better yet, only saw ads for things they had already expressed an interest in? The value of those same 30-second commercial slots would increase by orders of magnitude.

Google imagines a world where only single people see ads, and people who can't drive see ads from taxi companies where others see Toyota campaigns. Where fraternities see ads for strip clubs, beer, Cancun weekends and LSAT prep courses, and only seniors (and their adult children) see ads for Alzheimer's drugs. What would be the value of that increased efficiency, capitalized into present dollars? Ten billion? Fifty billion? I say the value is $100 billion -- 25 percent of the total U.S. advertising market and 15 times Google's current size.

Google is going to let the telco and cable companies burn their capital building out IP-TV, knowing that Google will still be the only game in town for the crux of the whole thing: the ability to show every viewer the specific ads that companies will pay the most to show him at that specific moment. What Google wants to do with these trailers is SERVE EVERY TV COMMERCIAL ON THE PLANET because only they will be able to do it efficiently. Only they will have the database that converts those IP addresses into sales leads, only they will have the servers and disk space close enough to the viewers to feed the ads. Only Google will have the chops to run a constant, real-time auction for the next ad every consumer is about to see, and then serve that ad at the moment the program goes to commercial.

Suddenly, everybody can (and, really, must) advertise on TV, because it'll be so specific...and so dynamic. If you start shopping for a new WiFi access point in the morning, Google will know, and that night when you watch Two and a Half Men, your ads will be from D-Link, Linksys and Belkin. And, further, they'll know that an intelligent buyer lives at your IP, so your ads won't show you a hot model demonstrating how they're plug-and-play, but will instead feature a quick recommendation from the SveaSoft guy about which AP's the best one for hotrodding.

You're puttering in your home office around 6pm when you hear your wife call out from the living room where she's watching CNN. She says she'd rather not cook tonight -- how about going out for Italian and a movie? You Google movie showtimes and restaurants, print out a list of what's playing, and a map to Antonio's, and walk out into the living room just as Wolf Blitzer is throwing to commercial...

Guess what the commercials are? Yep -- nothing but movie and local restaurant ads, with special "code words" to give at the box office and restaurant for steep discounts, good that night only. And it seems a new Italian place just opened up in town, and their commercial is hammering away at a recent review they got that said that they're so much better than that cheesy Antonio's dump it's not even funny. And it's half-off for new customers, tonight only!

But Google can't insert ads into an "American Idol" stream. Fox would just sue, right?

No, Google will cut a deal with every network to customize their ad spots for every viewer. For a small cut of their ad revenues, Google will handle all customization costs, hardware and software. The networks will all go along because the customized ads will be so much more profitable that it would make no sense for any network to refuse.

If I'm right, Google's current business will have been nothing more than a great test-bed for what will turn out to be their real business, which will be IP-TV ads. Program choice is just the Trojan horse that will be used to sell this to viewers; the essence of the IP-TV buildout is the fully domesticated consumer.

Far scarier, of course, is that Google will be handling all political advertising, and will eventually be helping networks customize their news offerings, too.

This just in! Apple Computer filed a lawsuit this week asking for a declaratory judgment against The two companies had long been in negotiations for a license to Burst's many digital media patents, a possibility I mentioned here several weeks ago. "I can understand why they did this," said Burst CEO Richard Lang. "It's an attempt to get the suit on their turf, though since both companies are from Northern California it is really all our turf. Apple is doing so much business in this area that (the royalty) is inevitably a very large number. We were willing to continue negotiations, but they decided to pull the trigger. Of course we are confident that we will prevail."

Burst will shortly file a counter-suit for patent infringement. With Apple remaking itself into a media company that is highly dependent on Burst-type technology for video distribution, this should make Next week's MacWorld even more interesting than we already expected.
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