Silicon Insider: The Google Factor

If online communities are the next big thing in high-tech, how do you make money off them?

There are two answers -- one hard, the other easy:

      Spend several years building a vast user base for your nonprofit community site. Then very, very carefully begin offering for-profit ancillary services to that population; or,
      Just start the community, prove the concept, then sell the whole thing to Google.

That was the ambivalent message of this year's "Silicon Valley Comes to Oxford," an event that has now become something of an institution at the Said Business School at Oxford University and among tech companies in the Thames Valley. SVCO, now officially in its fourth year, began five years ago when my assistant at Forbes ASAP, Ann McAdam, contacted the B-school, then just moving into its new building, and secretly arranged, for my birthday, for me to speak at the school.

As it turned out, I was the second speaker at Said's shiny new lecture hall -- the first being the guy it was named after: Nelson Mandela. The ultimate hard act to follow. Despite that, I apparently said enough interesting things about Silicon Valley and entrepreneurship that Dean Anthony Hopwood asked if I would come back the next year "and bring some friends" from Silicon Valley.

The gathering has grown from there, becoming a major event on the B-school's annual calendar. And this year's SVCO was the biggest yet, filling not only the 450-person theater, but spilling out into an extra hall where only the audio was piped in, recorded for U.S. radio by the Commonwealth Club, and covered by the British press.

One reason for the big turnout was that this year's panel was probably the best yet. For the first time, the event was given a theme -- "Networks in the 21st Century" -- and the lineup was first rate: including Craig Newmark, founder of Craigslist, and his CEO Jim Buckmaster; Chris Sacca, the new business development guy at Google; Evan Williams, co-founder of Pyra Labs (creator of and Odeo (podcasting); Robert Young, founder of Linux pioneer Red Hat; Reid Hoffman, founder of LinkedIn; corporate and securities lawyer Maria Sendra of Baker & McKenzie; and legendary venture capitalist Allen Morgan of the Mayfield Fund.

Google Flexes Its Muscle

What made the panel especially compelling was not just what was said, but what the individuals on the stage represented: The new twin poles of the cutting edge of high tech.

On one end is Google. Never in all my years covering Silicon Valley have I seen a company grow from small and fun to big and scary, from the celebrated to the feared, and from the casually dismissed to the obsessively tracked, in such a short period of time. All of this was on display at SVCO. In years past, Google was represented at the event by executive communications director Raymond Nasr, an old friend. Raymond would show up, make the audience laugh, and hand out Google tchotchkies to thrilled students.

But that was the old pre-IPO, pre-world dominance Google. Like many of his early-Google peers, Raymond has retired in great comfort as a still-young man -- and while Chris Sacca was just as relaxed and amusing, there was no mistaking who was the most powerful man in the hall. As he admitted, every day, seven days a week, he is sent more than 50 business plans and proposals -- every one of them wanting just a little piece of the billions of dollars of investment money he has at his disposal.

What was said about Microsoft in the mid-1990s is true now about Google -- nobody in Silicon Valley (or anywhere else in tech) makes a business decision these days without considering Google. And every new start-up must put into its business plan whether it intends to be bought by, partner with, or hide from Google.

Needless to say, that has begun to create enormous distortions in tech as both new start-ups and veteran companies have been distracted from their normal endeavors to play courtier to Google -- or, alternately, play the Google card to jack up the price to its competitors, such as Yahoo.

This can't go on forever, as Google's stock slip yesterday suggests. And no matter how much cash Chris Sacca and his counterparts at the other companies are sitting on, it won't be enough to fulfill the dreams of all of the players out there. And this is a good thing for technology world. This madness will eventually end -- and the sooner the better.

The Rise of Social Networking

Meanwhile, a different kind of frenzy characterizes the one tech area that only seems largely immune to the Google reality distortion field -- on-line communities, also known as social networks. The curious thing about these companies -- if you can even call them that -- is how they quietly strolled into our lives and, without our even noticing, made themselves indispensable. Just as impressive is how they've managed to make themselves appear to each of us as small and personalized -- even as they exploded to millions of users.

For example, I first heard about Craigslist in the late-1990s, not long after it started, when a few of my reporters casually mentioned something they'd seen on it. If I hadn't been tracking it over the years, I might still assume that was just an ad hoc online classified ad site centered around the San Francisco Bay Area. In fact, Craigslist now has a couple hundred sites around the world, with 3 billion page views, 10 million users, and 6 million posted classified ads per month.

In fact, so powerful is Craigslist these days that it is very likely playing a major role in the accelerating collapse of the newspaper industry -- as one audience member noted, extracting an estimated $17 million of revenues out of the San Francisco Chronicle alone this year.

And it isn't Craiglist alone. Remember last year the bitter complaint from the head of Encyclopedia Britannica about the rise of Wikipedias, those online encyclopedias created by their readers? As Reid Hoffman noted, his LinkedIn (4.2 million users) is rapidly becoming the vehicle of choice for executive recruiters. And MySpace, beloved by Gen Yers everywhere, with more than 40 million users in just two years of existence, may be the single most important new cultural phenomenon of this young century.

OK, But How Do They Make Money?

What's interesting about all of these social network sites is that they all share a common 'wiki' sensibility -- user participation, small staffs, non-profit orientation -- that seems at odds with traditional commercial business models. This fact even led one audience member at SVCO to ask if these organizations, by gutting existing corporations and replacing them with non-profit networks, weren't actually reducing wealth in the world. This question only earned non-committal answers from the panelists.

Yet, it is a compelling question -- and one for which an answer is only beginning to emerge. One very interesting possibility is that, for all of their communal pretensions, and even if they didn't start out that way, many social networks are in fact very clever Trojan Horses. The trick is to develop a very appealing nonprofit site, one that thousands of people will happily help you develop for free. Then, once you've captured this crowd, you let them run free forever in their happy domain … but begin constructing a for-profit shell around them.

Thus, for example, Craigslist offers its classified ads for free -- but charges for company want-ads. And companies are willing to pay for those ads precisely because of the huge universe of Craigslist users -- while users could care less as long as they have their own free classified ad and bulletin board preserve.

And that's just the beginning. You may have noticed that the wire services lit up last week when, at SVCO, Craig mentioned that he might even consider adding journalism to the site -- thereby completing the cycle of killing newspapers and then replacing them. It is a great strategy, and more power to him.

Finding Customers Without Sales

Will we see other social network sites follow the same path of building audiences with free services, then tapping into that home-grown market with for-profit goods and services? I think it's a sure bet. The great tech business story of the next few years may well be companies that create millions of customers before they even sell their first product. Especially if it turns out that the most valuable intangible asset of the Internet age is the commitment of your community, the loyalty of your network.

But once again, this may not be the only strategy. One company that everyone on the panel mentioned was Flickr, the non-profit photo archiving site. It remained pure … right up until the moment it sold itself to Yahoo! for an estimated $30 million. Flickr remains a non-profit service -- but now Yahoo! enjoys its image management engine, and its 250,000 users. Its founders, despite running a non-profit, just pocketed a ton of money.

In other words, as I noted earlier, it only seems like the social network world is immune from the Google Effect. In fact, a potential acquisition by Google or one of its competitors colors the planning of these companies just as much as their more obviously commercial counterparts in other tech industries.

Will this still be true a year from now? Stay tuned for Silicon Valley Comes to Oxford 2006.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone, once called "the Boswell of Silicon Valley," most recently was editor at large of Forbes ASAP magazine. He has covered Silicon Valley and high-tech for more than 20 years, beginning with the San Jose Mercury-News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, The Economist and Fortune, and for two years he was a columnist for The New York Times. He has hosted two national PBS shows: "Malone," a half-hour interview program that ran for nine years; and a 16-part interview series in 2001 called "Betting It All: The Entrepreneurs." Malone is best known as the author of a dozen books: his latest, a collection of his best newspaper and magazine writings, is called "The Valley of Heart's Delight" (Wiley).