Google Grows Up: Innovation WITH Permission

Two recent developments show Google pursuing a new path forward in innovation. Instead of trying to outdo the broadband companies while appropriating content without permission, the company is maximizing its strengths. Old Google tried to push broadband networks to the curb with its ultra-high-speed fiber network, but that project has been suspended. In its place, Google’s new play is in the other-the-top (OTT) cable TV business. For $35 a month, you can buy a 40 channel TV package from YouTube with a cloud-based VCR.

Google Fiber Failed to Produce a Benefit

Google Fiber has failed. There aren’t going to be any new builds, its CEO has left the company, and 9% of its workforce has been laid off. While there are a lot of explanations for this failure – city governments were hard to deal with, cable companies aggressively lowered prices, the FCC’s Title II regulations for broadband complicated the business – I think technology did it in.

The allure of gigabit speeds means more on a whiteboard than it does in real life. The most speed-sensitive thing we do on the Internet is web browsing, and the FCC’s Measuring Broadband America (MBA) program shows that web servers can’t serve up pages faster than 12-15 Mbps.

A broadband connection that runs several times faster than this doesn’t produce a visible improvement. Consumers can be induced to buy ultra-high-speed broadband plans because they mistakenly believe high advertised speeds mean something. But when they actually use them, they realize they’ve been scammed.

Gigabit networks won’t always be useless, however. Fiber will be a great backhaul for 5G wireless, and people will find ways to use the gigabit speeds made possible by full-duplex cable. But we’re not there yet.

Kansas City Didn’t Become an Innovation Hub

Not only were residential users disappointed by the promises of gigabit networks, entrepreneurs failed to see the hoped-for benefits as well. For example, Brian Schatz moved to Kansas City as soon as he heard about Google’s plan.

Schatz was building a photography startup that he believed would benefit from gigabit fiber. But five years later he’s yet to gross $100,000 per year. It turns out residential broadband speed has nothing to do with web-based services because web servers are located in colocation centers rather than garages.

And the problems of establishing a new business are about eyeballs, investors, and revenue streams. These don’t become any easier to solve just because you have what amounts to a city-wide Ethernet. The Internet is everywhere, so local conditions don’t matter very much.

At this stage in his career, Schatz is planning a trip to find investors in Silicon Valley. Investors like Boulder’s Brad Feld who targeted Kansas City have nothing to show for their efforts either. You would think these folks would have learned something from the fact that Silicon Valley became what it is with perfectly normal broadband networks run by AT&T and Comcast, but they didn’t.

YouTube Grows Up

YouTube started as a piracy hub. Its founders uploaded movies without any licenses to get the initial set of eyeballs, and turned a blind eye when users aped the founders’ behavior. This prompted a billion dollar lawsuit in 2007 that was settled after seven years of litigation.

YouTube finally developed the ContentID system for limiting access to the site by pirates, but generally failed to take advantage of the system it had built until very recently. One of the things that helped the company turn the corner was the FCC’s refusal to grant the company free access to cable TV programming through the bizarre set-top box proceeding.

Google had hoped to get access to content paid for by customers’ cable TV subscriptions. Once they had the programming, they were going to wrap it up with advertising and profit handsomely.

But that didn’t happen because too many legal barriers had to be crossed.  The main obstacle was the contracts content creators had with cable companies.

A Better Form of Leverage

The better plan for YouTube was simply to license content directly from creators with terms that allowed Google to exploit its ad placement system to its fullest advantage. This scenario – innovation with permission – actually removes the barriers that would have remained after a cooperative FCC did everything in its legal power to make Google happy.

The YouTube TV system addresses a market whose existence was proved by AT&T’s DirecTV Now. Demand for the AT&T service is so strong the company is struggling to build out enough server capacity to keep up with it.

With a mismatch between DirecTV capacity and proven demand, there’s a clear opportunity for YouTube to leverage its video infrastructure to collect subscription fees and sell ads at the same time. And best of all, YouTube TV customers don’t need to have cable TV accounts: true cord-cutters are the target audience.

Business Priorities

Old Google was a pirate rogue that wanted to disrupt the world by organizing all its information without the permission that comes from licenses. New Google – Alphabet – wants to get its share price up and make money. This strategy leads to different priorities.

It was inconceivable for old Google to pay for content and to rely on other people’s broadband pipes. Free-riding worked for a while and won the company a lot of praise among old-school Internet purists who believed “information wants to be free, man.”

It supported advocacy groups such as Public Knowledge and legal scholars in the grain of Larry Lessig that wanted to weaken copyrights. It fought endless battles over copyright enforcement and funded hundreds of white papers on the virtues of free content.

The Bottom Line

But Google’s share price modestly outperformed the S&P 500 while other Internet-based firms went gangbusters. Consider this chart that shows the S&P 500, Google, and Netflix over the last five years.

Google and Netflix vs. Stock Market Index

The S&P 500 index is the green line at the bottom, Google is the blue line in the middle, and Netflix is the red line on top. Everything Netflix did required permission and it dramatically outperformed the index and Google. Google’s performance was good compared to the index but weak compared to Netflix.

When a company as large as Google that aims to hire the best and brightest fails to prove its value in the markets, it’s not uncommon to see the kind of course correction we’re seeing now. Between Netflix, Amazon, AT&T, Apple, and YouTube it appears the tech sector is remaking Hollywood in its own image. This is going to make a great show.