Q. Let’s talk about Google. You came out against it to some degree last year, citing competition from Microsoft, Yahoo and AOL. But Google has done well. Were you wrong?
A. This is how I saw it: that Google has three major challenges in front of it. No. 1 is competition. They have a lot of money, a lot of power and they want Google’s business, so probably No. 1 for Google is competition. Problem 2 for Google is what I call “switching costs.” There are no switching costs to move from one search engine to another. Before Google, I used AltaVista. I changed to Google in about 27 seconds. I will leave Google in about 27 seconds. The third problem is, Google is a fantastic technology for a page-oriented, HTML-based Internet, which is what we have today. The problem is, we’re not going to stay in a page-oriented world.
These are fine points (although it is a little bizarre for Colony to implicitly claim ownership (“what i call …”) for the phrase “switching costs”. Nevertheless, he is right: from a pure search perspective there are no more switching costs at Google than there were at any of its briefly favored search predecessors. You could change search sites in heartbeat.
But that is devious illogic. Google has successfully levered its search prowess into dominance in other stickier markets, of which the most obvious and important are advertising brokerage & placement. While Google’s search business itself is no stickier than Altavista’s (or Hotbot’s, or …) , its media/advertising business has much higher switching costs. No, not infinite — Google is still not Microsoft — but higher than its search predecessors ever obtained.
Does that make it worth its current valuation? Of course not, but it is also a canard to fixate on the switching costs in Google’s search business when Google has cleverly increased switching costs where it count: Paying customers.