Without getting into the DRM question (is DRM bad/good), let's look at the notion that Google can ship a Pack of software for media access without driving its customer support costs into the stratosphere or cutting content deals that reduce the users' access to programming?
This is a company that Piper Jaffray's Safa Rashtchy says has a lot of upside, and indeed, if perfectly executed the Google search model is poised for a ton of growth. Investors should be wondering who customers are going to call when something goes wrong with Google Pack.Throughout its history, Google has generated revenues in the 88 percent range. Rashtchy touches in his report on the idea that margins could shrink, as does Henry Blodgett in his critique of Rashtchy's $600 price target for Google (Blodgett, a famous caller of high price targets, says there is a 33 percent chance that Google will achieve the business goals necesssary to justify the $600-a-share price).
The thing about Google, which "defines all things great about the web," according to VC Fred Wilson, is that no one has ever needed support to use a search interface. Wilson's in mourning over the introduction of the DRM, but investors should be wondering who customers are going to call when something goes wrong with Google Pack.
Google's bundling products from Real Networks, Symantec, Adobe, LavaSoft and Trillian, and it would be smart to drive support calls and costs to them. But the company's brand is riding the label and may be the provider of key elements of the software—the DRM and a media interface, specifically—so, it follows that support must be offered by Google. That's going to add to the company's costs.
Installing software on the desktop also makes Google the focus on problems perceived by end-users. When Google introduced its Desktop search, critics came out of the woodwork to complain about various aspects of the software, something Google was unaccustomed to. Google Pack will bring all the shortcomings of the partners and expose new flanks to attack at Google.
I'd be surprised if Google's DRM is something completely new. Why would RealNetworks' Rob Glaser make his software available in Google Pack if the RealNetworks DRM (and, by extension, his media server platform) weren't part of the deal? Even so, Google's already taking heat for introducing DRM into its mix and Google's likely to shoulder the majority of the cost of supporting the DRM and the rest of the Pack software.
All tolled, Google's costs seem poised to rise much faster than they have in the past. If ad revenue growth stays ahead of cost increases, everything will be hunky dory, but Google would be one of the rare companies to pull off that trick. Microsoft's an example fo a company that gained and held huge market share with extensive support of products. If Google's dedicated to competing primarily with Microsoft, it's P&L is going to change dramatically and margins will fall to somewhere in the 65 percent to 70 percent area. Google may eke out 75 percent margins, but we're still talking about a roughly 15 percent decrease in margins.
Then there is the problem of how Google can feature programming by partners, as it promised AOL when they closed an investment in the Time Warner subsidiary in December. The announcement said the companies will "Collaborating in video search and showcasing AOL's premium video service within Google Video". Presumably, CBS and the National Basketball Association, which are reportedly the first content providers to work with Google Video, will get some kind of preferential placement, as well.
The search value proposition is predicated on the broadest access to information and programming. With these content deals, Google starts to look more like a promotional vehicle for a small silo (granted it will get larger) of video programming. Driving traffic to partners requires Google to de-emphasize alternative non-Google hosted content in results.
AdSense thrives on ridiculously wide coverage of the data on the Net, giving Google a vast inventory for its customers' ads. Now that its partners are asking for and getting preferential treatment of content, the breadth of search is at odds with the requirements of content partnering. That could constrain revenue growth, even as costs continue to rise.
I don't know if this is a recipe that will work. What do you think?
I'll be watching John Battelle's blog for his thoughts, once his embargo expires later today.