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May 20, 2007

Too Much of a Good Thing......?

Historians (especially economic historians) widely believe that nations that discover a single huge natural resource (e.g., oil or gold) always rue the day.  For several reasons (in addition to the crippling corruption that always occurs), the natural resource skews (screws up) all governmental (and private) decisions.  Two main dangers:  (1) because the newfound riches make it impossible (or, at least, hard)  to calculate the "cost" dimension of "cost-benefit" analyses, lots of bad decisions (both public and private) get made (e.g., the resource gets squandered), and (2) countries that discover a single natural resource wealth always fail to diversify their economies, educational systems, and other "intellectual property" infrastructure; this is bad for the country while the resource is plentiful; even worse, obviously, when it runs out.

A couple of canonical examples are (1) Spain in the 16th century, via its discovery of gold in Central and South America, and (2) Saudi Arabia, via the discovery (by Britain) of vast oil reserves in the late part of the 19th century/early part of the 20th.

Spain's experience has been recounted many times.  A readable account (with much other interesting information and analysis) is contained in David Landes, "The Wealth and Poverty of Nations". A good book on the phenomenon (in part), more generally, is Jared Diamond, "Collapse" .

The Saudi Arabian story has also been much studied.  Tom Friedman has written about it numerous times in the New York Times (articles now only available behind the Times Select subscription wall).  Several good books (among many) on the topic are  Albert Hourani, "A History of the Arab Peoples" , Bernard Lewis, "What Went Wrong"  and Sandra Mackey, "The Saudis: Inside the Desert Kingdom".

I wonder if similar factors apply to companies.  I'm thinking Microsoft  and Google .

Seems foolhardy to wonder about Google  at the moment.  They continue to hit the ball out of the park, quarter after quarter.  But, a few years ago, it would have seemed equally foolhardy to wonder about Microsoft .  Now, after 5 years of the stock price floating within a fairly narrow band, and with the Company (1) either struggling in major new markets (the web) and/or (2) "succeeding" in new markets (e.g., video games) only at the cost of losing what has to be billions of dollars, one wonders....

For Microsoft , Windows and Office were their "gold" and "oil".  I wonder if those two gushers of cash made it hard for the Company (full of enormously smart people) to make hard decisions about where to take the business because, at least in part, there was nothing the Company couldn't do (from a financial POV).  So, it's sunk billions into efforts online (e.g., MSN), in video games (Xbox and game software), media tools, the home network, mobile, etc., with either limited success or success at enormous (and unprofitable) cost.

Same for Google ?  AdWords and AsSense are, obviously, hugely successful -- two more gushers of cash that appear unstoppable.  But what about Orkut, Google Maps, Blogger, Gmail, etc.  None of the other Google  offerings seems to have achieved anywhere near the dominance (and money-generating ability) of AdWords and AsSense, even with 20% of the Company's engineering time allocated to noodling new stuff.  This has been noted by industry observers, e.g., in Business Week, The San Francisco Chronicle, as well as others.

I wonder if the success of AdWords and AdSense makes it hard to decide what to do next because, in a sense, there's nothing the Company can't do.

Might be useful here to consider the parable of Buridan's Ass.

I'd love to hear from readers what they think.  Would also be fun to get a thoughtful response from MSFT and GOOG, although their status as public companies (subject of a future blog post) may preclude this.

May 20, 2007 | Permalink


Excessive reliance on a single natural resource...Dutch Disease?

The analogies that you posted are interesting but today, with the highly inter-linked economies, this danger is not present.

Certainly not with nimble Google and behemoth Microsoft!

Posted by: Artorios | May 23, 2007 6:56:39 PM

i'd say danger(1) is probably true, danger (2) probably is not.

MSFT/GOOG have a very distorted sense of cost/benefit for their projects, but at the same time their approach of driving forward to "feed the mothership" makes tons of sense. no good reason for msft to make specific money on IE or windows media player, or for google to charge for blogger or picasa. as long as they measurably drive people back to the core cash cow, then it's a very worthwhile investment. problem is, driving value back to the mothership (either in terms of traffic or brand value) is a pretty hard thing to adequately measure. so much noise there.

Also, I don't think MSFT/GOOG fail to diversify - they actually hyper-diversify and they'll ultimately overextend themselves and their armies. So perhaps the fallen empires of Rome and Britain are a good analogy here...

Posted by: danny | Jun 8, 2007 10:48:11 PM

Great Analogy!

Google = Ads
Microsoft = Windows

They are trying different products without success for the time being. Although, I think, Google has the potential to become the operating system of the Internet with all the applications on top of them.

In my opinion, they are entering into applications a little too early. I thought they were to become a more solid OS and a platform to allow anyone's application on it.

Further, they are diluting their efforts to see if anything sticks on the wall. I do not blame them. This is what they learn on their business approach. No strategy planned. Just hard work and a product that appeared economically appealing.

Mario Ruiz

Posted by: Mario Ruiz | Jun 12, 2007 3:28:18 PM

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