Switching Costs and Incentives
Google makes most of its money from ads (over 95% of revenue), and a very large portion of these appear on search results.
If Google wants to keep making money, it must encourage people to keep using its site for search. But the switching costs for search engines are very low (change a browser setting and/or a bookmark and that’s it). Right now, the average internet user probably doesn’t know how to do that, but that’s mostly because there hasn’t been a need for it so far; if Google was to significantly fall behind the competition or anger its users (and then turn a deaf ear to the complaints), how to switch to a different search engine would become common knowledge in the same way that people figured out how to switch from Altavista and Lycos a few years ago.
So Google’s incentives are aligned in such a way that it has to keep making products that are liked and very functional, and it must avoid at all cost giving its users reasons to switch. They also benefit from a vibrant web ecosystem with users constantly going from one site to the another (not staying on Facebook all day) and looking for new things.
Things are different at Microsoft. It makes most of its money from the Windows operating systems and the Office suite of applications. With these, switching costs are significantly higher than with search for the average user. We’re not talking about a few simple clicks anymore. This is scary enough that most people will endure a lot of pain and put up with a lot of inconveniences before they’ll consider dropping Office or Windows (especially the latter).
This creates different incentives. Microsoft benefits from increasing switching costs further, which is probably why they’ve historically tried to keep the interoperability of their products with competitors to a minimum (proprietary file formats in Word, for example).
They also benefit a lot less from making their products bug-free, intuitive, and aesthetically pleasing than an underdog like Apple, for example. If Windows is buggy, most people will keep using anyway because of the high switching costs, but if OS X was as ugly and buggy as Windows, nobody would pick Macs instead of Windows PCs. Of course, this is not absolute; if Microsoft does worse than usual (Vista) and the competition improves significantly (OS X Tiger), the switching cost calculus can become tempting to marginal users, but even that isn’t enough to convince most people.
Facebook is in a position a bit similar to Microsoft these days. Once you are signed up and have created a network of friends and family, the switching costs are very high. Most people don’t want to be members of too many social networking sites (Twitter succeeded because it was different enough to be complementary), and small competitors don’t benefit from the networking effect.
This is why Facebook is such a walled-garden, and it explains why Facebook is trying to make its users as dependent on it as possible (Facebook Connect for other sites, a soon-to-be-launched Facebook email to further increase switching costs, Instant Messaging features to replace other IM clients, etc).
Facebook is still a young company, they’re still growing and still have a bit of startup culture in them. But I wouldn’t be surprised if in a few years they started to act like Microsoft. There won’t be much ‘stick’ left to punish them when they don’t give a good user experience to their customers (what are users going to do, leave Facebook and go to a social network where they don’t know anyone?), so chances are they’ll focus on keeping things “just okay” and making it harder to switch.
Obviously things like GMail, Google Maps, Google News, Google Buzz, etc, are ways to keep you close to the Google Search page. But they are not integrated in that product the way that the .doc format is integrated with Microsoft Word. You could easily have Bing as your default search engine but have a direct bookmark to GMail (or POP3/IMAP).
This is why I’m not expecting Google to degenerate too much (at least as long as switching costs and incentives are the way they are). They will make mistakes, and when an 800lbs gorilla slips, it can cause a lot of damage (Google Buzz’s initial privacy problems are a good example of this). But I’m not expecting them to rest on their laurels or stop listening to their customers as long as search – a product with very low switching-costs – is their main business.
But as always, I might be wrong about this, so if you think there’s something important I’m overlooking, let me know in the comments.
Update: Case in point, while I was writing this Google announced (only 4 days after Buzz was launched) that it had made a few major modifications to the way Buzz works because of the feedback it received. The problem should never have happened in the first place, but they’re certainly being more responsive about things that anger readers than Microsoft or Facebook.
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