Five Years Too Late

May 6, 2009

Of Tigers and Twitters

Filed under: Uncategorized — Tags: , , , , — fiveyearstoolate @ 9:40 am
Eric Wiesen

Eric Wiesen

I’ve been thinking lately about the tech industry’s occasional tendency to declare a world change prematurely. Originally I was sparked into this thinking by Paul Graham’s article on “How TV Lost”, which took it as a fait accompli that despite the nascence of IPTV, web video and entertainment convergence generally, TV (and its accompanying ecosystem) had already lost, it just didn’t know it. It was a provocative piece and got me thinking.

Whether I agree with the Paul’s conclusion or not (I don’t necessarily, although I agree with much of the underlying logic), it’s what this represents that really got me thinking. We as an industry are quick to see “up and to the right” and extrapolate ad infinitum. In other words, we see a trend with spectacular velocity and we are quick to connect the dots to a massive, game-changing shift. And it sometimes happens, but it usually doesn’t.

I’m reminded of the discourse that emerged after Tiger Woods won the Masters in 1997. Tiger came in as a 21-year-old phenom and utterly blew the field away. I’m not much of a golfer, but they tell me that when you win a major by 12 strokes (largest margin since 1870) and set the course record at a legendary course, it’s pretty good. (Thanks Wikipedia)

But what really struck me was some of the discussion I heard afterwards. “The sport is over” summed up what a lot of people thought after seeing Tiger’s performance. The world of golf had changed and no one else would stand a chance for the next 25 years. Tiger was so far and away superior to everyone else that if you’re going to watch, you mostly just watch to see what he’ll do.

So what actually happened? Tiger is arguably the greatest golfer of all time. He’s second all-time in majors and third in PGA event wins. Youngest ever to win the Grand Slam. Highest-paid athlete in the world last year. Currently ranked #1. Tiger is absolutely, incontrovertibly for real. And yet… he doesn’t win every tournament. He had a few years when he worked on his swing and wasn’t dominant. He got hurt. In other words, he’s a very very gifted, but nonetheless human, golfer. The sport goes on, more popular and arguably better for having such a fantastic athlete, but essentially the same game.

Which brings me to Twitter. Twitter is a little bit like Tiger. It burst onto the scene at SXSW in 2007 and for a while, it was all people could talk about. It faded somewhat and people talked about Facebook or something else for a while, and then around the election last year, Twitter “tipped” and now it’s really become ubiquitous, particularly amongst the media. Companies are wondering what “twitter strategy” they should have. Conferences are being organized about how to best “expose your brand in 140 characters”. People have talked about Twitter threatening Google or Microsoft.

I think Twitter, like Tiger, is for real. I’m active on it and I get a lot of value from it. I think its position as “social radio”, where I can tune in either to contemporaneous thoughts from a group of people I find interesting, or to a particular topic, is powerful. Twitter is a winner.

But that being said, I think we’re essentially doing what people did in 1997 with Tiger. People look at Twitter, extrapolate its buzz and growth into the future, and conclude that our lives will never be the same. I can’t tell you how many people in the last 90 days I’ve heard propose a twitter-centric solution to a problem. To contextualize where I think we are right now, I’d go back a couple of years to the months following the launch of Facebook Platform.

Facebook launched applications to great fanfare. The following week I was at a conference where a successful entrepreneur told the crowd, “If I were starting a company today, I’d build for Facebook first, the web second”. People were racing to see who could say, “Facebook is the social operating system of the web” first. People saw the buzz, the instant engagement, and simply pulled the trend forward ten years into a world where operating systems were gone and we all just booted straight into Facebook and led our online lives in Facebook applications. So far, it hasn’t turned out that way.

As a VC, part of what I try to do is see the world as it will be some day. It’s a tough task, and I think anyone that claims to get it right most of the time isn’t being honest. I don’t know if, in the future, Twitter will replace email, social networks and online advertising. I think it probably doesn’t, but I think it has an important role to play in communications going forward. But generally speaking, I think that if we want to forecast the future as best we can, assuming that what’s hot right now inevitably emerges into a paradigm-shifting change in all of our lives is not the best approach.

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March 31, 2009

If You Build It…

Filed under: venture capital — Tags: , , , , , , , — fiveyearstoolate @ 10:38 am

Stuart Ellman

Stuart Ellman

Eric Wiesen

Eric Wiesen

“Should I build my company to be a profitable, standalone business or should I be aiming to fit into the long-term plans of my likely acquirers to facilitate an M&A exit?”

This is a question that entrepreneurs ask themselves every day. If you asked a hundred venture capitalists this question, I suspect the overwhelming majority of us would give you the canonical answer – build for long-term profitability and a standalone business, because the tides of M&A can come and go. In the previous era, many VCs liked to see every investment as an IPO candidate. And that made sense in an era when a pre-revenue web company burning cash could actually go public. But in today’s market, when even nine-figure companies with positive EBITDA can’t go public, it is worth asking this question again.

The argument for the traditional answer is simple and compelling – when you go to start your company, you don’t know what Google or Cisco or Dell will be buying in 3-5 years when you achieve sufficient scale to be interesting to them. As a result, if you build toward M&A, you’re likely to build toward whatever they’re buying when you start, and that will likely change significantly over the build period of your company.

There is also a huge issue of stage and valuation. Acquisitions tend to happen in two lumps. First is the “cheaper and quicker” route. This means that Dell can buy something for $10 to $25mm because it is cheaper and quicker than building it themselves. The second is “they already have scale” route. Obviously, a company like Dell can pay a great deal more for a company that sufficient scale that cannot be reliably replicated simply by recreating the technology. A good example of that would be the acquisition of Pure Digital Technologies (creator of the Flip video camera) by Cisco. Could Cisco build its own version? Sure. But they paid almost $600mm because Flip already had brand and scale . (BTW, kudos to Jonathan Kaplan, CEO of Pure Digital and a former RRE CEO). If you are selling in the “cheaper and quicker” category, it better be at a single-digit valuation. Nothing past a Series A.

The emerging counterargument is that the IT landscape has so significantly consolidated that the it’s become easier to project the tectonic movements of the “continental” companies like Microsoft, Google, Cisco and Dell. But is this true? Can you forecast what these companies are going to do? We sold MessageOne to Dell because it wanted to make a big move in hosted services. Could we have forecasted this in 2001 when we funded the company? Again to the Pure Digital example, how could you have guessed that Cisco would be going after the consumer market in 2002 when Jonathan was raising his first round.

We think this question is being answered in real-time. The standard advice to build for the long term is still good advice, but if all the exits are going to be via M&A for the foreseeable future, we’ll be thinking pretty hard here at RRE about what the big guys are really looking for. We still want to fund great entrepreneurs solving big problems in growing markets. But we also want to know what acquirers are looking for. Time to get smart in this area.

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February 12, 2009

Rolling 8 the Hard Way

Filed under: Startups, venture capital — Tags: , , , , — fiveyearstoolate @ 5:45 pm
Eric Wiesen

Eric Wiesen

Stuart Ellman

Stuart Ellman

Experience in the venture business teaches many lessons. One that is often painfully learned is very easy to see from a distance but hard to see when down in the trenches. There are easy ways to make money and there are hard ways.

At one level this is intuitively obvious, but at another level, it’s clear that a lot of folks (founders and investors alike) don’t necessarily see the world through this lens, and as a result, a lot of businesses get started that are just not really geared to creating excellent investment returns.. At this point, we must make it clear that making money (i.e. generating profits), is not the same as successful deal exits. Many companies come in the door to our firm with clear paths to go from $10mm in revenues to $50mm in revenues and they are much less interesting as investment than some companies that have no revenues and fuzzy plans for profit generation but can solve large problems and will be highly sought after. This may seem confusing, but lets dig a little deeper. It really comes down to markets and competitive positioning..

What’s the easy way to make money? The easy way is the traditional way: solve a problem that lots of people have (or a very big problem that a few people have) and offer them a really good reason to pay you lots of money for what you made or do (we might call this a “value proposition”). Hopefully you’re doing it in a way that isn’t being done by a dozen other companies, and in a way that isn’t easily replicable by others. The easiest business in the world is one where you have something everyone needs and you’re the only one that has it. So if you could manage to situate yourself over the world’s biggest undiscovered oil well, you’d be set – you have something people need and (milkshakes not withstanding) you are very hard to displace. To use an example closer to home, a startup came to us looking for money. They had four people and an idea. The idea was a technically elegant way to create additional money for e-tailers with little downside. They had nothing built and two pilots lined up. They wanted a high valuation and they got many competing term sheets. They also had $0 revenues and it was unclear when they would really start to make money. Why was this deal “the easy way?” Because it was a hard ROI, created money in a sector that needed profits, was reasonably hard to copy, and whatever e-tailers used it had a competitive advantage. Therefore it would either get big very fast or get bought very quickly no matter what the financials looked like.

A friend recently asked, when told about this way of looking at companies, whether Google was an easy model or a hard one. And the truth is – Google was a hard model that turned into an incredibly easy one. If a startup came in the door and said, “we’re going to become the primary destination for search on the web, then sell ads against that search activity”, my guess is they’d have a hard time convincing us (or anyone else) how they would accomplish the first part of that, since changing consumer behavior around search is extremely challenging and expensive. However, if Google came in the door in 2001 and said, “We are already the primary destination for search on the web – now we’re going to sell ads against that search activity”, it would be moderately obvious how easy it would be for them to make money at it. Because the hard part of the model – building a huge stream of consumer activity – had already been accomplished.

So with that backdrop in mind, we’ve been looking at new deals that come in the door explicitly with this question in mind – does the company have an easy model or a hard model? This has particular resonance around B2C companies. While a lot of people in 2009 view the web as synonymous with “software”, B2C web companies that give their service away and monetize with ads (or other behind-the-scenes streams like lead generation) are media businesses, not software businesses. Those that charge for web services are software businesses. So – salesforce.com is a software business while Yahoo Finance is a media business. And startup media businesses are challenging, especially today. The really tough part is how many of them there are. As previously mentioned, there was an explosion of B2C web companies a couple of years ago, along with an explosion of ad networks launching to try to monetize them. This crowding, along with the current collapse in display ad rates, makes a web-based media startup (especially one starting from a dead stop) a very hard way to make money.

Let’s look at another example to compare the startup that sold to e-tailers above. A different startup came in selling a useful but inexpensive enterprise solution. It had $5mm in revenues, a clear pipeline for more sales up to $10mm, a very solid and earnest CEO and management team, solid reference accounts and well known VC backers. This is the “hard way.” Because this is a specific industry with large players that dominate the competitive landscape, the exit possibilities are few. The existing players are large and trade at about 1X revenues. Even if the startup struggles and really succeeds for the next five years, it will not be large enough to remain a standalone company and there will only be two to three potential acquirers who will not have the stock multiples to pay much more than the money being put into the company. And this is if everything goes right.

Without turning this into a portfolio survey for RRE, one thing we’ll note is that many of the companies in our portfolio that are continuing to do well even throughout this difficult economic period are those that have easy models – they make something someone (either businesses or consumers) need (or at least really want) and sell it in a relatively lightweight way. They are also answering unique problems and are changing the competitive paradigm of the industries in which they compete. And this learning will likely inform how we look at new opportunities that come in the door.

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February 5, 2009

Is Capital Efficiency the Enemy of Innovation?

Filed under: venture capital — Tags: , , , , , , — fiveyearstoolate @ 2:17 pm
Eric Wiesen

Eric Wiesen

I’ve been thinking about two themes that have generated a lot of discussion lately. The first is a growing sense that we are in a period of weak innovation; that Silicon Valley (and the rest of the US tech ecosystem) is broken, and that most of what’s being invented today is incremental, with no real innovation taking place. The second is strong focus on capital efficiency within the technology startup world.

At this point, given both the trends in web development and the macro economy, it’s practically a race between the entrepreneur pitching and the investor being pitched as to who will bring up how capital efficient the business is. The large majority of companies we see these days make a point of how capital efficient their models are, and the majority of investors (VCs and angels alike) are quick to dismiss companies that are viewed as capital inefficient.

Let’s step back for a moment and talk about what capital efficient means, and then we can get to the heart of the question. Capital efficient, in its simplest form, means you can accomplish a lot with a small amount of capital. And of course if you stop there, it sounds like an unadulterated good thing. More for less, right? And as a first-order question, I think the answer is yes. Doing more with less is a good thing.

But the second theme contextualizes the first for purposes of our question. We are in a period where much of the technology innovation taking place is in “soft technology”, be it software, web services, technology-enabled services or data businesses. And while it’s certainly an enabling environment that so many of the tools required to create these businesses have become commodity and free, there is an increasing concern that people are simply using free, easy tools to create slightly better versions of things that already exist.

Because how many of the really innovative technology companies throughout history were actually capital efficient? Whether we’re thinking about Edison Electric or Google, Amgen or Intel, Nvidia or Nucor, we often find that companies that really transformed industries with new technology or approaches took a large amount of capital and significant time to achieve it. And while these are clearly cherry-picked data points, I think that even on the web most of the really significant, innovative companies have taken in quite a bit of resources along the way.

I was recently on a panel with a friend of mine who’s an angel investor. And what shocked me was when he said that his group was looking primarily to invest in businesses that could, from a dead start, achieve profitability on significantly less than a million dollars of capital. And while, on its face, this sounds amazing – who wouldn’t want to invest in businesses like that? – another part of me really had to wonder, can you build anything interesting or important if that’s the hurdle you establish at the outset? Would any of the companies who have significantly raised the innovation bar have fit that screen, back then or now?

So I don’t think there’s a clear answer – we at RRE Ventures are clearly going to continue to seek businesses that can accomplish their goals with as little capital as possible, because it’s essentially obvious to do so. But I also agree with the criticism that “Web 2.0” has been at least in part an exercise in excessive capital efficiency, and that people were building incremental products and services with no real innovation in the hope of a quick flip or tuck-in acquisition. In the back of my head, I’m still going to be thinking about opportunities to create something really transformative, even if the road is a little longer and tougher.

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November 20, 2008

What’s in a Name?

Filed under: Uncategorized — Tags: , , , , , , , , , — fiveyearstoolate @ 7:59 pm
Eric Wiesen

Eric Wiesen

I’ve been on a few panels (and been in the audience for many more) that focus on starting up a company. A lot of the questions (unsurprisingly) are about starting up web companies and best practices around doing so. Inevitably, one question arises:

“How much does the name matter?”

What does surprise me is the answer I usually hear from VCs, successful entrepreneurs, and other luminaries:

“It doesn’t matter.”

They go on to say focus on your product, great customer experience, scalability and all the other important company-formation features. And I agree that those are all critical, first-order concerns. But I disagree that names don’t matter, at least where consumer-facing applications and services are concerned.

Businesses generally don’t care what things are called – they have the time and financial interest to due significant due diligence on various offerings (although truthfully it doesn’t always happen) and decisions are made around more metrics-oriented decision criteria. But consumers are a whole different ballgame. You need to grab a share of their increasingly overwhelmed and attention-deficit suffering consciousness. You need, to use a metaphor I like in many contexts, to be no or low-friction. And your name is the first thing they are going to see.

So I’d lay out three rules for naming a consumer-facing web product:

  1. Be easy to spell
  2. Be 8 characters or less
  3. Be in plain language

You don’t need all three. But you need the first and one of the last two to have a good web name. Looking at some of the top (US) consumer-facing websites, let’s see how they stack up:

Yahoo (Easy to spell, 5 characters, arguably plain language): 2.5/3 PASS
Google (Easy to spell, 6 characters): 2/3 PASS
YouTube (Easy to spell, 7 characters, plain language): 3/3 PASS
MySpace (Easy to spell, 7 characters, plain language): 3/3 PASS
Facebook (Easy to spell, 8 characters, plain language): 3/3 PASS
Blogger (Easy to spell, 7 characters): 2/3 PASS
Ebay (Easy to spell, 4 characters): 2/3 PASS
Amazon (Easy to spell, 6 characters, plain language): 3/3 PASS
Flickr (5 characters): 1/3 FAIL

This is a somewhat cherry picked list, but most of remaining top sites by traffic are either abbreviations (MSN, AOL) or similarly compliant sites (live.com, photobucket, etc…). We find only one site – flickr – that doesn’t meet these criteria for consumer-facing name success.

We can speculate about why this is, but I would suggest that the obvious answer is likely the right one, as Occam would say. If consumers can’t remember, recognize or spell your name, they are unlikely to get to your site via direct, type-in traffic. That leaves you with SEO, SEM and other indirect methods for drawing in users, all of which are important, but without that initial primary funnel you may struggle. To pick on Charles (because I know he can take it), iminlikewithyou is not a good consumer-facing name. It’s 15 characters, is plain language, but includes a word with an apostrophe, so it only partially passes the spell test. Really good product, bad name.

We can draw some conclusions from Flickr’s success, or we can just say it’s the exception that proves the rule. Flickr built its audience largely of “net natives” who quickly adopted the “missing e” as the next creative web naming convention (sort of like ____ster became earlier), and we’ve soon lots of similarly-spelled “Web 2.0” company names. In fairness, a lot of this is driven by domain squatters taking many of the plain language names. But in the absence of plain language, I would argue that your new company’s name should be short and easy to spell, even if it’s meaningless (worked pretty well for Google). Sure, the tech-saavy crowd may figure out del.icio.us but will your parents or your friends who aren’t “webheads”? If you are comfortable building a big, successful business out of just us (it can be done), by all means. But if you are going for mainstream…

Ultimately, if you are being thoughtful about your core site, service or application, you are carefully instrumenting your processes (registration, sign-on, setup, etc…) to minimize the waterfall of dropped users and are being diligent about removing friction to lower bounce rate and registration failure. Don’t start out on the wrong foot with a name that won’t stay with potential users. Path101? Good. Xoopit? Well…

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October 15, 2008

You Can Lead a Horse to Water…

Filed under: Startups, venture capital — Tags: , , , , , , , — fiveyearstoolate @ 11:24 am

Eric Wiesen

When talking to companies, frequently consumer-facing companies, I often have a version of the following short conversation below:

Me: So the product looks really great – how are you going to convince consumers to switch to you from [old, hidebound web 1.0 service or manual process]?

Founder: Well, that old [site/product/service] is terrible! Ours has better functionality, is more reliable and look how pretty the rounded corners are (ok, I made that last one up). People will see how much better our product is and users will flock to us. Word of mouth will be inherently viral.

This is a dangerous place to be with your business, and if you’re talking to me or most of my colleagues you’re going to get a lot of push back on this line of reasoning.

Let’s step back. When I was in business school I was fortunate enough to have taken a strategy class from Bruce Greenwald. Professor Greenwald has a powerfully descriptive and predictive framework for considering the competitive positioning of a given company (although I am still working through how to best apply his precepts to early-stage businesses). The framework essentially posits that while there are many different strategic forces acting on a company (including Porter’s five, for the MBAs and business geeks out there), the one that matters far more than anything else are barriers to entry. And if you break down Greenwald’s view of barriers to entry, he looks to one of several sources.
1. Proprietary Technology
2. Economies of Scale
3. Customer Captivity

The first two are pretty well-known in the technology world. Many of the first several generations of successful companies were built by developing technology that others couldn’t match and couldn’t legally copy. There are plenty of examples on the web and elsewhere of companies that have built scale advantage (Ebay, Amazon). And the best companies will have all three (Google).

But I want to talk here about an aspect customer captivity and a how it potentially impacts early stage companies. Professor Greenwald argues (and I agree) that customers (particularly consumers, although businesses as well in limited circumstances) can become captive through sheer habit. There are other, more obvious forms of customer captivity (technology lock-in, ongoing investment, loyalty programs, etc…) but these aren’t present in, say, a consumer-facing web service. And so it seems pretty easy to lure customers away with a better product. And to some extent this logic is rationale, in that if you have chosen to compete against companies without these more obvious forms of customer captivity, you’ve done your business a favor.

But it’s a mistake to think you’re out of the woods just because switching costs are low. In fact, the unseen switching costs of customer habit can be dauntingly high. By way of example I’ll use (as I often do) my mother. My mother uses AOL. My dad got the whole family AOL accounts in 1995. I never used mine because I already had a university account and my younger brothers eventually ditched theirs as well. Even Dad ultimately switched. But Mom is still chugging away on AOL. My brother (who spent almost four years at Google) tried endlessly to convince her to switch to the more elegant, functional and reliable gmail. No dice. She’s used to AOL. And so she stays.

I bring this up because it demonstrates some powerful captive behavior. Email is an impure example because the archives and persistence of a long-standing email address provide additional sources of captivity besides habit. Think about someone you might know who still uses the travel site they started using in 1997. Or the mapping site they started using in 2000. Better alternatives have arisen since then, yet people frequently “just stay with what they know”.

This has powerful implications both offensively and defensively for your web business. Offensively it means that you can’t simply rely on “if you build it, he will come” product superiority. Customer habit is such that EVEN IF users can be convinced with marketing to check out your terrific new product, your war is far from won, because some large percentage of them will say some variant of, “Yeah that’s cool. But I’m fine with what I have”. Your marketing battle with this customer has just begun. On the defensive side, it is useful to think about instrumenting your product or service to encourage customer captivity. And while that sounds nefarious, it doesn’t have to be – building habit and addictive experience is powerful medicine, and by building customer habit you are generating captivity explicitly by delivering value to your customers.

Build something that users want to use every day and by the time someone comes out with something a little shinier, you will have the benefit of customer habit. Today, though, you need to work on how to overcome it.

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October 3, 2008

Please Hold the Google Comparisons

Filed under: Pitching, Startups, venture capital — Tags: , , , , , — fiveyearstoolate @ 8:56 am

We get pitched on a lot of products that are designed to be hugely profitable primarily at very large scale, or which are platforms for the underlying monetization of otherwise less valuable digital assets. And with the aim of highlighting the scope of the opportunities presented by the business being pitched, many stray into comparisons to a certain successful company that is very profitable at great scale, and that succeeded in monetizing a big piece of the web. Whether your business is directly analogous (as a few are) or not particularly so (as most are), I’m asking you to please be very judicious with the Google comparisons.

Every investor you pitch knows that Google was the most successful venture-backed company of the past 10 years. And it goes without saying that every one of them would like to back “the next Google”. But please also note that every startup that wasn’t Google didn’t turn out to be Google. It’s ok to analogize your service to either consumer or advertiser modalities that have been proven out by Google. Generally speaking, we at RRE don’t like to see business models that require major shifts in user or customer behavior underlying the success thesis, so if you think either your users or your customers (to the extent that they are different) have been “trained” by Google (or some other highly successful company) to act in certain ways that enable your business, by all means demonstrate that you understand your users well enough to make the point, and that you have seen major proof in the real world that users will act the way you project.

Ultimately, though, please be mindful that making repeated references to Google is not going to cause investors’ eyes to turn into dollar signs as they envision a 1000x return on your company. The more frequently you repeat it, the less effective it becomes. If what you’re doing is deeply vertical, don’t say “we can be the Google of fishing” because the whole point of Google is its staggering horizontal reach. A corollary of this is only say that you are the “Adwords of ___________” or the “Adsense of __________” if you have a really good story to tell. Adwords monetized search and adsense monetized the long tail of content. Those are big stories. If what you have an interesting self-service model, try to figure out a way to tell the story without claiming to be Adwords. If you have a cool distributed content story, tell it in a way that doesn’t just try to associate with Adsense.

In the end, the investors you want involved with your company won’t be fooled by Google analogies, and the companies good investors want won’t try to do it.

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September 25, 2008

Thinking about Google’s New Platforms

Filed under: Digital Media — Tags: , , , , , , , , , — fiveyearstoolate @ 1:10 pm

In the last month we’ve seen the release of both Google’s new browser, Chrome and the first handset based on Google’s mobile operating system, Android, the G1 from T-Mobile. In both cases, the knee-jerk popular response arc seems to be the same, “Hey new product from Google this is great… hey wait a minute, it’s not that great… ah forget it”.

With Chrome, people got excited because a) it was a new browser, b) it was from Google and c) it was (is) fast. But then people realized their firefox plugins wouldn’t work, and some web applications (like … Microsoft Office Live) don’t work, and it didn’t change their browser experience THAT much. And so while some people are using it every day, the tech cultural zeitgeist essentially moved on, at least for now.

With Android and the new T-Mobile G1 phone, the large majority of the conversation I’ve seen has focused largely on feature-by-feature comparisons with iPhone. The conclusion seems to be that this phone isn’t as cool as the iPhone and kind of looks like a Sidekick. Oh, and it’s not open enough because you can’t use VOIP instead of T-Mobile’s minutes. And because you can’t buy it from T-Mobile, and then ditch T-Mobile for another carrier (“Sim-locked”). So people conclude that Android’s openness is a sham and that the project is a failure.

Let’s step back from both of these sets of immediate concerns and think about what Google is actually trying to do with both Chrome and Android. For a number of years now many people (myself included) have wondered what comes next for Google. The company has thousands and thousands of employees working on all manner of things, but essentially only two of the products (Search and Ads) contribute to the top line in any meaningful way. And so the question arises, what is going to be Google’s next great business?

Chrome and Android aren’t designed to make money for Google. They are designed to advance Google’s unifying position as a company that produces applications that run on networked devices (and sells ads on the inventory generated by those applications). To date, Google has developed primarily for PCs running Internet Explorer and to a lesser extent Firefox, Safari and (back in the day) Netscape. But moving forward, the great trend (both on the consumer side and on the business side) is toward applications that run out of the browser (web services if you like, or Software as a Service). In fact this is the vision that drove the first “browser war” between Microsoft and Netscape back in the 1990s. Even then it was clear that enormous volumes of activity and time would be spent on browser-initiated interaction, rather than on client-side applications.

So with Chrome, Google is looking to build out a big piece of browser real estate that is built in ways that will optimize the operation of Google’s (and presumably others’) web applications. Some of the architectural features – each browser tab runs as a separate process, there is a task manager for the browser, etc… indicate that Chrome is an attempt to take web applications seriously. And of course if Google controls the underlying browser’s technology, it can assure optimal operation of its applications both offensively (in terms of designing the apps and the browser to work well together) and defensively (against the possibility that IE/ActiveX might unduly benefit Microsoft’s own emerging web application ecosystem).

With Android, Google looks further into the future. Developing for mobile devices is a complete disaster today. Mobile software companies who want to develop applications for various dominant platforms today (iPhone, Blackberry, Windows Mobile, Symbian and a host of others) have to employ teams of engineers, manage multiple codebases and learn the ins and outs of various handset hardware and OS restrictions. The idea behind Android isn’t that as a developer you will be able to be free from all carrier restriction (Google doesn’t have that power, neither does Apple). The carriers are still a very powerful and very challenging force here in the US. I think that Google’s notion is that developers should have a superior environment in which to build applications that can access capabilities of the handsets on which they reside. I think that looking forward, Google sees the mobile web as pervasive on handsets as the consumer web is on desktops today. The current universe of mobile devices renders this vision nearly impossible to realize.

Ultimately, the handset released by T-Mobile yesterday has almost nothing to do with the long-term possibilities Android represents. Sure, it’s a first-generation device that’s less sexy than the iPhone. But the real battle isn’t going to be between these two physical devices. In some sense it hearkens back to the original Apple vs. Microsoft battles of the 1980s. Apple built a beautiful, closed system while Microsoft let any PC manufacturer install DOS. Again, Apple curates the App Store while Google gives Android away to handset manufacturers and application developers as an open-source product.

We’re still in the early days of this, but both of these products indicate significant forward thought by Google. It will be fascinating to watch both of them advance (or not) the company’s agenda.

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