In 2005, Google became an Internet powerhouse. In 2006, the search giant made its global ambitions known, and applied its power to new markets, both online and off.
Overview
Well it’s December, so it must be year in review time.
Though Google ended 2005 with an ill-fated experiment selling ads in magazines, the search giant renewed its advertising efforts in 2006 with projects involving radio, cell phones and newspapers. Google launched a slew of new products, while executives touted the company’s global ambitions and focus on mobile applications. While Yahoo was left struggling and Microsoft seemed to lose its innovative edge, Google powered forward.
Of course the biggest story of the year was Google’s acquisition of YouTube, a surprise purchase that ostensibly adds an ever-growing amount of video advertising inventory to Google’s store. But Google’s path to monetizing YouTube is still unclear, and executives have vowed not to muddle YouTube’s user experience with ubiquitous advertising.
But while YouTube was Google’s shining moment, the search giant’s reputation was tarnished over its policy in China and for releasing too many products. Google was busy in the courtroom too, as the company was sued several times in Europe for trademark and copyright infringement. In the United States, Google paid $90 million in click fraud settlements.
Despite the much-publicized click fraud issues (or perhaps because?), Google easily capitalized on the growing online ad market. Google was lauded for its efficient advertising algorithms and its deal with MySpace, while competitor Yahoo failed to effectively monetize its inventory. As for search, Google’s share of search queries continued its year-long rise until July, and has since maintained a healthy lead.
Financially Google had a tremendous run, with their stock price up $65 over the course of the year. For Q3 Google reported revenues of $2.69 billion, an increase of 70% compared to the third quarter of 2005 and an increase of 10% compared to the second quarter of 2006. Excluding traffic acquisition costs of $825 million, revenue was $1.87 billion.
International and Mobile Focus
In February Google CFO George Reyes, speaking at a Merrill Lynch conference, made a curious statement: “Clearly our growth rates are slowing.” Shortly thereafter Google shares took a tumble on Wall Street, but the news wasn’t really a surprise — search was moving from a period of dazzling hyper-growth to a period of maximizing efficiency. While Google was beating it competitors handily, it was time to shift focus to new markets and new opportunities.
To wit: Google began to focus more of its efforts on the burgeoning mobile sector. In June Google executives said London would become the center of operations for Google’s next phase of growth. As the year wore on, Google released several mobile products, including a java-powered Gmail client and Google Maps for mobile with live traffic data, and announced it was testing mobile AdWords in eight countries.
Google CEO Eric Schmidt made no secret of the company’s focus, even suggesting at one point that mobile phones will eventually be free thanks to advertising. “The world is a very big place and Google has very much a worldwide mission,” he said during Google’s Q2 earnings call. “You’re going to see more and more international focus, international expansion, international growth … So many people will ultimately be using mobile as their information source, and not just from an information perspective, but also from a monetization perspective. The opportunities before us really are unlimited at this point.”
China, Censorship and Privacy
Google would find plenty of those opportunities in China, but not without cost.
In January Google announced it would introduce a new version of its search engine for the Chinese market. But to obey China’s censorship laws, Google agreed to purge its results of any sites the Chinese government of which the Chinese government disapproved. Google co-founders Larry Page and Sergey Brin admitted to agonizing over the decision — they even created an “evil scale” — while CEO Schmidt said the move was “absolutely” the right thing to do. (Check out Google Blogoscoped for a great example of how image results are censored.)
Compared to Microsoft, which agreed to censor an MSN Spaces blog written by a Chinese blogger, and Yahoo, which collaborated in the jailing of a Chinese journalist, Google’s presence in China seemed relatively benign. To avoid policing their content, Google offered no e-mail or blogging services. But Google’s rationale, that’s it’s better to serve users in a limited manner than not serve them at all, seemed to be a cynical way of jockeying for market position. [1] In February Google executives were called into Congressional hearings and compared to Nazi collaborators. “That makes you a functionary of the Chinese government,” said Jim Leach, an Iowa Republican. “So if this Congress wanted to learn how to censor, we’d go to you.”
Google hired away famous Microsoft engineer Kai-Fu Lee to run their Chinese operations in 2005, but struggled to gain traction throughout 2006. The search giant’s market share in China was only 25% in October, while Baidu controlled 67%.
China wasn’t the only country where Google was having problems. In January the US government requested billions of pages of search history from Google, Yahoo, Microsoft and scores of other Internet companies. While some companies capitulated to the request Google demurred, though a federal judge forced Google to comply with a smaller request in March. [2]
During that same month Google hired a lobbying firm to champion its interests in privacy, China and net neutrality. Google’s lobbying efforts in Washington hadn’t gone according to plan. In July, Sergey travelled to Washington on a last minute lobbying trip. That effort proved to be a bust, and Google was criticized for its political naivety. Google later urged its users to help lobby for net neutrality, and began searching for public policy leader in Europe. Meanwhile Google redoubled its efforts at Google.org. Google’s non-profit arm began investing in the development of a hybrid automobile and pushed for more efficient computer batteries.
Lawsuits
2006 was a busy year for Google in the courts. In February the adult site Perfect 10 scored an injunction against Google by arguing that Google image search probably infringes copyright law “by creating and displaying thumbnail copies of its photographs.” The case is now on appeal before the Ninth Circuit. 
In July a California judge approved Google’s $90M click fraud settlement. The settlement protects Google from any lawsuits stemming from complaints from 2002 through the settlement date, and Google is betting that future improvements in click fraud protection plus the creation of industry standards will further enhance its position. Over the year Google made several improvements to AdWords, including a click fraud rate monitor. Of course some AdSense users still believe Google is gaming the system.
Beyond click fraud, Google’s largest lawsuit story involved a company called Kinderstart, which accused Google of lowering their rank in Google’s index, thus costing them business. Kinderstart lost that case, but several bloggers noticed that Google’s legal argument creates confusion about how and whether their Pagerank technology works.
Google also faced legal problems in Brazil over pornography on Orkut. Google faced pornography charges in New York too, though the lawsuit was later dropped.
Google’s most persistent legal problems came from oversees. Google was sued by French publishing group La Martiniere for digitizing its books without permission, sued in Israel for over rival AdWords purchases, and sued again in France for showing ads for Louis Vuitton rivals. Google also continued to face challenges with a lawsuit from Agent France Presse regarding Google News, a service which was also a problem for Belgian publishers. Meanwhile the Author’s Guild lawsuit dragged on and on.
Suffice to say, unfavorable results in the courtroom could force the company to change its business plans. But Google isn’t one to shy away from legal challenges, and some say Google actually welcomes court battles as opportunities to set favorable legal precedents.
Google Buys YouTube
Google’s biggest legal challenge yet may come from YouTube. In October Google shocked the business community by acquiring the video-sharing site for $1.65B.
Many observers questioned the wisdom of the deal; even though YouTube made a flurry of content deals only hours before the purchase, the site remains a constant target for copyright lawsuits. Two months later, Google is apparently still working to appease media companies, some of which have banded together to investigate whether YouTube is vulnerable to legal action. Good thing Google squirreled away $200 million for “indemnification obligations.”
After the sale went through, an SEC filing revealed Google’s concern that litigation against YouTube could force Google to change its business plans. But the only lawsuit so far comes from a tube processing plant in Ohio, which is upset about the Web surfers navigating to their Web site, utube.com, by accident.
If the legal future of YouTube is unclear, Google’s path to monetizing YouTube is even moreso. Executives vowed not to muddle YouTube’s user experience with ubiquitous advertising. YouTube co-founder Chad Hurley said the site was working on a mobile option; a few days later, YouTube announced that Verizon mobile phones would offer limited YouTube content. Meanwhile YouTube’s new sister site, Google Video, began its ascent into relevancy when Google placed a link to the service on its homepage. The site offered a Sponsored Videos program in October then gained NHL content after ending its partnership with the NBA.
Competition with Microsoft
Microsoft began 2006 arguing that Google isn’t Microsoft’s biggest competitor, but a series of Google partnerships and product launches this year seemed to be aimed right at Redmond.
The first warning shot came in January at CES, where Google announced Google Pack, a suite of third-party software and free Google apps, each of which competes with a Microsoft product.
Then came a brief furor over browsers. In April Firefox became the first non-Google product to be featured on Google’s homepage. Shortly thereafter Google voiced its objections to IE7 defaulting to the MSN search engine and began targeting IE7 users to switch to Firefox. This, despite the fact that Google didn’t urge Firefox to ask users to make a search engine choice and maintains a partnership with Dell that makes Google the default search engine on Dell PCs.
As the year wore on, Google introduced several products that competed with Microsoft desktop apps. Google acquired Writely in March, released Google Calendar in April, released Google Spreadsheets in June, and released Google Docs in October. At every turn, Google denied competing directly with Microsoft, arguing that their strategy was more pro-Internet than anti-MS. Even so, each product release put Google, bit by bit, in a position to circumvent desktop software and take people directly to the Google cloud. Microsoft watchers, meanwhile, were left wondering if Redmond could still innovate.
New Products
Google’s biggest new product this year, judging by online buzz, was definitely Google Checkout. After more than a year of speculation, Google launched the payment processor for online merchants in June. Though some merchants said the app was too hard to integrate with existing shopping cart software, Google made several improvements. By November, visits to Checkout were up 30%.
Google Checkout wasn’t the eBay-killer everyone thought it would be because it wasn’t a general purpose online wallet. But that didn’t stop eBay from banning Checkout from its accepted payment methods.
Besides the aforementioned productivity apps, other product launches that caught the public’s attention were Google News Archive Search, Google Trends, Google Notebook, Google Project Hosting, and Google Custom Search Engine.
And then there’s Google AdSense for Audio. Google bought radio advertising company dMarc Broadcasting in January. Despite its struggles with magazine advertising, Google clearly intended to continue attacking offline markets. Google tested radio ads in at least one market during the summer. Towards the end of the year there’s been speculation that Google AdSense for Audio also includes podcasting advertisements, but no products have been announced as yet.
Product Speculation that Didn’t Pan Out
Despite Google’s focus on productivity apps, the oft-heralded “Google Office” never appeared. Another no-show: the Google OS, a recurring phantom product that’s been discussed since at least 2004, or 2003 if you count Matt Webb’s idea that Google is building the Memex. Speculation about the Google OS started again in July when The Register reported that Google was working on Goobuntu, a Google-flavored version of the popular Ubuntu Linux distro. Turns out Google does use Ubuntu internally, but representatives deny any plans to release a Google OS to consumers.
Another big target for speculation this year was Google Tunes. In January a Bear Sterns analyst predicted Google would roll out a music download service. (We can trace that rumor back to Dave Winer in 2005.) Speculation got a boost from Philipp Lenssen, who posted details on a Google MP3 player, but no music store has been forthcoming.
And then there’s GDrive. During its second annual analyst day presentation, Google accidentally released annotations on Powerpoint slides that indicated plans for a massive storage system. Google kept mum, but then in October Philipp Lenssen got his hands on the actual GDrive client. Like Goobuntu, GDrive seems to be only for Google’s internal use.
So no GDrive, Google OS or Google Tunes. How about Google TV? A few bloggers noted that Google has been hiring interactive TV managers and product engineers. Sergey even co-authored a paper in 2003 on searchable TV data. But Google’s interest in TV is nothing new. That said, Google’s acquisition of dMarc this year may put the company in a good position to branch out into television adverising. And a patent awarded to Google for snooping on ambient audio from your TV and pairing those sounds to your computer to serve up ads had some people wondering…
And no list of speculative products would be complete without mentioning Google Health. In March we found out that Google was working on specialized health searches, and then we heard that Google hired Adam Bosworth for a position called “Architect, Google Health.” In May Google announced Google Co-Op, a platform for building custom vertical searches.Soon after Google was displaying drop-down menus to help users clarify health searches.
Problems at the Googleplex?
The court room wasn’t the only place Google had trouble. A series of errors on its corporate blogs, including the accidental deletion of the main blog, had some bloggers wondering about quality control problems at the Googleplex.
Some new Google products, meanwhile, met with mixed reviews. Google Video stumbled out of the gate. In June Google suffered from a bad data push that let hundreds of thousands — if not millions — of spammy pages into the index. And then in November Google shut down Google Answers.
But Google redoubled its efforts. Amid criticism that Google was spreading itself too thin, Sergey began an internal project called “Features not Products” which urged Googlers to refocus on making existing applications better. During the year Google made significant improvements to Google Reader, local maps, toolbar, Google Groups, Google Base and Google Books, just to name a few.
Expanding reach through partnerships
2006 was a huge year for partnerships that would help Google distribute its apps to a wider audience and circumvent Microsoft’s control of the desktop.
In May, Google announced a landmark deal with Dell that would see Dell PCs loaded with Google Toolbar for Web and PC search. In June Google announced a partnership with Adobe in which Adobe agreed to distribute Google Toolbar for MSIE with Shockwave downloads. And then in September Google struck a deal with Intuit to place links to Google Apps in Quickbooks 2007.
The Kitchen Sink…
Google made several real estate moves, including the purchase of the historic garage where Larry and Sergey first worked on their search engine. Google also purchased its old headquarters and leased new land in Mountain View. Google announced plans to build a solar-powered electricity system for its Mountain View HQ, and opened a new office in Manhattan in what happened to be one of the largest carrier hotels in North America. Google also opened several offices around the globe, including in Egypt and Turkey. Google opened its first international office in Dublin in 2003.
…And a whole lot more.
This synopsis doesn’t touch on everything, and I probably missed an important product launch or bit of news that you remember. Please let me know in the comments.
[1] FWIW, I understand that Google is compelled by fiduciary responsibility to its shareholders to work in China. However, arguing that it’s “better to serve users” in a limited way rather than not at all suggests that Google is providing a moral good (indexing data) that counterbalances or outweighs a moral wrong (cooperating with a dictatorship). However, since Chinese citizens already have access to censored information via baidu.com and other search engines, it’s difficult to understand how Google’s presence contributes to their plight. That said, Google’s long term argument — much like the United State’s long term argument for allowing China to participate in the World Trade Organization — is that their presence and its attendent influences (through personnel and technology) will contribute to the gradual erosion and eventual cessation of censorship in China. While I agree with that long-term argument, Google only does damage to its reputation by continuing to apply good vs. evil polemics to business matters. Profit is not morality, and the two shouldn’t be conflated. For a more nuanced and very compelling summary of Google’s position in China, read Clive Thompson’s article in the New York Times.
[2] It was a rough year for data privacy. In August AOL researchers released search data from 650,000 users. Though the data was anonymized, the New York Times used it to positively identify at least one Web user.
