11 July 2009

Betting on Google (or Why Chrome OS Is a Lottery Ticket Worth Scratching Off)

The guys at Google came up with a secret sauce in the form of algorithms that efficiently and quickly search the Internet. They understand probabilities. And that might be as good a reason as any to bet on their continued success.

Google has a fascinating policy of letting programmers work one day a week – 20% of their time – on their own projects. This has already translated into popular products like gmail and google news. Some projects come from central management and some come from the cubicles. This is not much different from successful economies where some projects (e.g., NASA or the early Internet) come from centrally-planned government programs and some come from unexpected sources like the garage or the back of a cocktail napkin.

One of the insights to come from the world of probabilities and into the world of finance in the last century is the notion of the high probability of low probability events. The lottery is the simplest example. The odds of any ONE person winning are incredibly low. Buying a lottery ticket to win money is almost like buying an airplane ticket to commit suicide. The odds are terribly low for any one person to win and yet the odds that SOMEONE will win are incredibly high.

Venture capitalists differ greatly from bankers in this regard: they take an equity position in success and know that only a small percentage of their investments have to become the next Yahoo or … well, Google in order to offset the many investments that don’t pay off. They don’t embrace failure but they know it is inevitable.

Google has seemed to realize that a corporation has a huge advantage over a venture capitalist in this game. A corporation can provide a risk free environment in which individuals can start projects that might become market successes or merely technical successes or might never become successful. The corporation can provide the infrastructure (e.g., HR, marketing, etc.) that can absorb so much time from the entrepreneur. And if one of these projects like gmail or google news should become successful, they offset the many projects that don't come to fruition.

Further, even the failures are never clearly failures. If an employee learns a new skill or gains a new market insight from trying something new, that can be applied to the next venture. And with everyone taking on their own project, the entire organization has a vastly different mindset in regards to projects. Thinking about how to create and deliver products to market becomes pervasive. This sort of culture can be more valuable than any one project.

All that to say that the many critics who are already pointing out why Google Chrome OS – Google’s attempt to capture Operating System market from Microsoft – will fail could be right. The odds of this ONE product becoming a success are pretty low. (But it is still a good bet. Microsoft gets about $15 billion a year in revenue from Windows.) But each time they try another venture like this, the odds of generating profit to match what's generated by their search engine go up.

Oh, and one other thing. I remember when Microsoft’s Excel and Word were obvious failures. It took some time before they seemed like something other than cute substitutes for the seemingly invincible Lotus 1-2-3 and Multimate Word Processor. The fact that gmail does not have as much market share as Outlook does not mean it will not eventually have more. It is rarely the released product that conquers the market – it is usually the evolved product that owns a market.

It is true that lottery tickets are unlikely to pay off. It is also true that only people who buy them ever win the lottery.

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