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Today, if you have a few million bucks to spare, the Federal Communications Commission will be auctioning wireless licenses in the 700 MHz band — primo space in many respects because it is lower on the RF spectrum and offers longer range. But Auction 92, as it is called, is anything but primo, since it is for licenses that either received no bids in the previous Auction 73, held in 2008, or were sold in that auction to organizations that never paid in full. That earlier auction, which I covered at the time, is a sad story of opportunity lost, especially for Google.

Remember how that freed-up spectrum was up for auction and Google made loud noises about bidding. I even predicted that they would bid, because that’s what I was hearing from inside the Googleplex.  Google wanted to set up a national wireless network to rival anything from Verizon or AT&T. Only Google didn’t follow-through on its threat to bid and the frequencies were cherry-picked, instead, primarily by the big wireless incumbent carriers who have for the most part done little with them.

They bought the spectrum primarily to keep it out of play, to keep a viable competitor from emerging.

That decision not to bid back in 2008 seemed very short-sighted of Google. But now I hear from people who were inside the FCC at the time that Google was privately told by the Bush Administration not to bid.

What if Google had defied this government nudge? I guess the threat was they’d have it taken from them anyway through some regulatory action or legal challenge. But had Google succeeded, we wouldn’t be seeing bandwidth caps being imposed today on wireless data plans. And wireless data would be cheaper everywhere.

Our tax dollars at work….

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Nortel Networks, the bankrupt Canadian telecom company, came that much closer to disappearing completely yesterday with the cash sale of its portfolio of 6000 patents for $4.5 billion to a consortium of companies including Apple, EMC, Ericsson, Microsoft, Research In Motion (RIM), and Sony. The bidding, which began with a $900 million offer from Google, went far higher than most observers expected and only ended, I’m guessing, when Google realized that Apple and its partners had deeper pockets and would have paid anything to win. This transaction is a huge blow to Google’s Android platform, which was precisely the consortium’s goal.

Google is the youngest of these companies and has probably the smallest patent portfolio, most of which isn’t mobile or telecom related. This puts Google and Android at a legal disadvantage and explains the 45 patent infringement suits that one analyst says Google in presently facing in the mobile area alone.

Google would have preferred to win the auction, but with the consortium sitting on more than $100 billion in cash, the outcome came down to determination, not resources. Google stayed in it only long enough to make sure of the consortium’s intentions and to make the purchase more painful for them, if that mattered.

It certainly mattered to Google, because that $4.5 billion number will be at the heart of the inevitable anti-trust lawsuit Google will file almost immediately. Every good anti-trust lawyer in America just cancelled his or her July 4th holiday to prepare their pitch for Google, which will probably claim Restraint of Trade as well.

Given that the courts will shortly be involved, Google can probably operate unfettered for another 2-3 years, during which they’ll try to build their own mobile patent portfolio. Google may well be able to use the courts to slow the actual Nortel transaction, too, according to my lawyer friends.

So the “Android is dead” story here is way premature.

In the long run, remember, Google will probably be able to use its legal strategy to force the consortium to at least license some or all of the patents. They’ll get a royalty from Google, I suppose, and thus benefit from Android’s success, but then Google is unlikely to be completely deterred, either.

The story everyone seems to be missing here is who gets what in this consortium deal? Most journalists and bloggers seem to assume the winners will all share equally in the IP spoils. But I have people who know people and the word I am hearing it that’s not the way the consortium works at all.

Some consortium members get patents, some get royalties, and some just get freedom from having to pay royalties.

Notice Nokia isn’t in the consortium? The Finnish company is apparently covered by Microsoft, tying Nokia even more firmly to Windows Phone.

Here’s the consortium participation as I understand it. RIM and Ericsson together put up $1.1 billion with Ericsson getting a fully paid-up license to the portfolio while RIM, as a Canadian company like Nortel, gets a paid-up license plus possibly some carry forward operating losses from Nortel, which has plenty of such losses to spare. For RIM the deal might actually have a net zero cost after tax savings, which the Canadian business press hasn’t yet figured out.

Microsoft and Sony put up another $1 billion.

There is a reportedly a side deal for about $400 million with EMC that has the storage company walking with sole ownership of an unspecified subset of the Nortel patents.

Finally Apple put up $2 billion for outright ownership of Nortel’s Long Term Evolution (4G) patents as well as another package of patents supposedly intended to hobble Android.

At the end of the day this deal isn’t about royalties. It is about trying to kill Android.

Note — Here’s a pretty good account from Reuters of the Nortel patent auction. You’ll notice they don’t include the participation breakdown of the winning bid (who gets what) that so far appears no place but here.

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Apple’s announcements yesterday about OS X 10.7 pricing (cheap), upgrading (easy), iOS 5, and iCloud storage, syncing, and media service can all be viewed as increasing ease of use, but from the perspective of Apple CEO Steve Jobs they perform an even more vital function — killing Microsoft.

Here is the money line from Jobs yesterday: “We’re going to demote the PC and the Mac to just be a device – just like an iPad, an iPhone or an iPod Touch. We’re going to move the hub of your digital life to the cloud.”

Just like they used to say at Sun Microsystems, the network is the computer. Or we could go even further and say our data is the computer.

This redefines digital incumbency. The incumbent platform today is Windows because it is in Windows machines that nearly all of our data and our ability to use that data have been trapped. But the Apple announcement changes all that. Suddenly the competition isn’t about platforms at all, but about data, with that data being crunched on a variety of platforms through the use of cheap downloaded apps.

What this requires from Apple is a bold move that Microsoft would never make: Jobs is going to sacrifice the Macintosh in order to kill Windows. He isn’t beating Windows, he’s making Windows inconsequential.

Having been shown the way by Apple, I expect Google to shortly do the same thing, adding automated backup, synchronization and migration to Android and Chrome.

Both companies will be grabbing for data, claiming territory, and leaving Microsoft alone to defend a desktop that will soon cease to exist.

And what happens once all our data is in that iCloud, is there any easy way to get it back out? Nope. It’s in there forever and we are captive customers — trapped more completely than Microsoft ever imagined.

Apple and Google will compete like crazy for our data because once they have it we’ll be their customers forever.

This transition will take at most two hardware generations and we’re talking mobile generations, which means three years, total.

With no mobile market share to speak of and Windows 8 not due until 2013, Microsoft is likely to be too late to the party, with much of Redmond’s market cap transplanted eventually to Apple and Google.

Some will say this is unlikely because of Microsoft’s grip on enterprise sales, but consumers have been leading the IT market for the last decade and the mobile transition will only accelerate this trend.

The quicker Microsoft can turn itself into IBM the better for Redmond, because that appears to be their only chance.

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Search is a fundamental component of intelligence or even thought.  Maybe that’s why Google is now calling it knowledge. Our brains are already good at search. Look around a room and every object your eye passes is identified in your brain. Something out of place? It catches your eye.  That is where we are headed with Internet search, though not exactly the way one might expect.

This is where every new generation of computer scientists brings-up the idea of artificial intelligence. If only we made the network smart enough to know not only what we really mean but what we really need. Maybe someday, but for now don’t hold your breath waiting for that one.  Starting in the 1980s fortunes were spent and lost developing artificial intelligence that wasn’t, well, very intelligent. Absent some breakthrough that I have yet to see, this is not a good path to follow even today. Fortunately it isn’t really needed, at least not yet.

Google’s approach is leveraging its existing strength, which is hardware optimization. A couple years ago the company did research to figure out at what processor performance level — at what percentage of CPU capacity — data center power consumption was minimized. No other company but Google would consider a strategy of deliberately throttling-back its data centers.

Whether Google even realized it this approach to transport efficiency has been around for a long time… in aviation. What Google separately sought were two very special data center power levels known in aeronautical engineering as the Breguet Number and Carson’s Speed.

If you’ve never heard of a Breguet Number don’t feel bad.  It is the power level (typically represented by a cruising speed) at which a particular aircraft will have the longest range on its internal fuel. Fly faster or slower than the Breguet Number and you won’t go as far before running out of gas. Every airplane has a different Breguet Number, though the rule of thumb says that 32 percent power is pretty close. I don’t know what power level Google came up with from its data center research, but it is likely in that 32 percent range.

Google found that by operating its CPUs at very low power levels it could broadly optimize search in terms of total power consumption. Running at higher power levels (faster CPU clocks) could get you more search results but with a total power bill that was higher in simple terms of watts-per-search.

Operating data centers at their Breguet power level means building three times the facility that Google would need if they ran the place the old fashioned way — balls to the wall.

Deliberately having three times the computing power available brought unintended consequences — the same consequences that any 17 year-old experiences when they replace the stock engine in their old clunker with a powerplant three times as big. Google acquired a lead foot. The first result of that lead foot was Instant Search — using extra CPU cycles to prefetch search results in real time. It’s not something Google set out to do but rather an unintended consequence of overbuilt data centers.

This brings us to Carson’s Speed. Bruguet was a French engineer best-known for his family’s fine watches, while Carson was a professor at the U. S. Naval Academy.

The problem with Breguet Numbers for pilots is that airplanes are intended to go fast and Breguet-friendly power levels are slow and boring. Going faster is a constant temptation with airplanes because they are of necessity built with a lot of excess power — power that is needed for climbing to altitude. An airplane built with an engine small enough to only reach Breguet Number speeds wouldn’t have enough power to even get off the ground. If you have excess power (and finite patience) what is the best speed to fly?

That would be Carson’s speed — the speed to get the most extra speed for the least extra cost. Or, as Carson put it, of finding “the least wasteful way of wasting.”  For aircraft the speed in question turned out to be 1.32 times the speed for most miles per gallon (the Bruguet Number). Carson’s Speed uses excess power most efficiently.

Other than three G-V’s and one Boeing 767 built for a harem, Google flies data centers, not airplanes. But Google’s situation going into its power experiment was actually very similar to aviation because it was an exercise in reducing power. Google data centers weren’t built to Bruguet specs, they were faster. Given this excess computing power that had already been paid for in capital terms, what was the most efficient way of using it? Carson’s Speed — about 43 percent power — leaving plenty of excess cycles for new services like Instant Search.

But once you enable Instant Search for everyone, the data center is again running consistently above its Carson’s Speed which means you need even more hardware to bring the building back to 43 percent. It’s an arms race that until this moment only Google may have known they were conducting.

Google competitors have been constantly building new data centers, too, but they never knew there was a specific target beyond just keeping up with Google.

Google sees the excess power above Carson’s Speed as a safety margin in case traffic spikes or a data center goes down, which makes sense. But is also a strategic advantage over Google competitors.

Having discovered its lead foot, Google will employ it more and more. We’ll see whole new types of brute force services aimed at using excess CPU cycles against expanded data sets to reduce the distance between searching and finding. If a question is answered as quickly as it is asked and all the answers are cached and analyzed the results may actually start to appear before they are needed.

That, my friends looks a lot like knowledge.

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Back in 2008 I declared that the information economy was giving way to what I called the search economy. The Internet was making it more important to know how to find information than to actually possess that information, because data — and therefore the fully-explored truth of any matter — might be constantly in flux. Even more to the point today, we need the same knowledge on many devices so it is usually better to find the link than to maintain multiple copies of aging data. This might explain in an ass-backwards way why Google just changed the name of its largest tech division from search to knowledge. A more accurate explanation for this name change is just that Microsoft’s Bing has better marketing than Google. But in the longer run the distinction between search and knowledge probably does mean everything.

Bing is a major influence on Google. Though Google is vastly more successful in terms of search volume, Bing has influenced Google’s look and feel, especially in the way that results are displayed. An even bigger success, though, has been Bing’s marketing campaign calling itself not a search engine but a Decision Engine — looking beyond the search to the answer.

Microsoft did more than just try to out-search Google. They gave some serious thought to how to make the quest for information on the Internet more productive and useful. Bing struck a chord with users and competitors alike and one result is that Google, too, is becoming more results-centric. That’s what is largely behind this perceptual shift from search to knowledge. It was behind Google’s Instant Search results, too — a technically non-trivial effort that lies at the heart of what this particular column is all about. For the moment, Google trading search for knowledge is just posturing, but in the longer run it has really significant meaning. It’s a game-changer.

“Not all smart people work at Sun (Microsystems),” Bill Joy used to say and not all smart people work at Google, either. You can put together the smartest team and still not produce the best product for any number of reasons, which Google is beginning to realize, especially as the company is having trouble retaining technical talent. It’s a small enough world where the current Google brain drain probably is worth the nine-figure bonuses the company has been handing-out here and there to keep important would-be defectors in the fold. But in the long run some of these big brains will leave anyway, so Google has to find a way to compete despite their loss. That way is through knowledge, the company has decided.

But actually moving from search to knowledge — from searching to finding — turns out to have a heavy systems component. As they show with Instant Search, Google’s sustainable advantage probably lies not in software but in hardware optimization. What they do may be a little better or a little worse, but if they can do it faster and (here’s the important bit) do more of it, Google will retain its lead and dominant market share.

This is a hardware war and Google so far is winning, primarily because most of their competitors don’t even realize that’s what is going-on.

Time for Cringely’s seventh law of information technology: all things evolve to abstraction over time, becoming uninteresting commodities. That’s what is happening right now in searching, which is why the major players are trying to jump to the next level, to finding. This is a case of evolve or die.

Microsoft and Google and their competitors, if any, may know a crapload of computer science, but for the most part that is becoming irrelevant. The fastest way to sort numbers was discovered years ago and mathematically proved. That’s not going to change. It is completely uninteresting trying to invent a faster method of sorting.

“What’s next after X?” on the Internet can usually be answered by turning the question into “what if X were utterly ubiquitous and free — what could we do then?”

That’s the question Google is now asking itself with prompting from Bing.

Next — the future of search…

There is so much to write about but I’ll begin with Microsoft buying Skype for $8.5 billion. The pundits are debating whether this move by Microsoft CEO Steve Ballmer makes good business sense, but that’s the wrong way to look at it. The better approach is to wonder what would have happened had Microsoft not bought Skype? Based on the high price alone I’m fairly confident that Ballmer felt he had no choice but to buy. In fact I’m fairly certain he felt that not buying could have doomed Microsoft.

Remember eBay bought Skype a few years ago for $2.6 billion, failed to make a go of it, then took a big write-off and sold much of the rest of the company to private equity firms. Skype was changing hands at a discount to the old eBay price only a year ago, so what had changed so remarkably to make Skype suddenly worth more than three times as much? Nothing had changed operationally. In terms of pure financial performance Skype isn’t worth anything like $8.5 billion. But the corporate chess board has changed quite a bit in the last couple years so it is possible to see where this acquisition might make strategic sense to Microsoft.

Ballmer and his company are at a tipping-point and he knows it. Microsoft is still big and powerful and rich, but no longer is it the biggest, most powerful, and richest. It is no coincidence that Department of Justice oversight of Microsoft’s anti-trust consent decree ended this week, because Redmond is nowhere near the threat to competitors that it used to be. The company can go from here either up or down and Ballmer’s fear is that the direction will be down, down, down. Microsoft will still make plenty of money but that might be from milking declining markets.

Ballmer needs a new market to milk.

Maybe that new market is telecom. Here is where I might write a paragraph about the Microsoft vision of unified communication where they’ll suck market share and market cap from the old telcos. That’s happening already and if someone is going to benefit, why not Microsoft? But I’m not writing that paragraph because I don’t think Ballmer or Microsoft are actually that smart. They have lost confidence. Microsoft no longer believes it controls or even can control the game. Worse still, they don’t have confidence that they even know the rules. So they’ve adopted a defensive posture and this Skype acquisition is more of a block than anything else.

Microsoft bought Skype to keep Google from buying Skype.

Notice I didn’t mention Apple. In terms of being the baddest MoFo in the market Apple has no peer, but Apple is following its own very different course. Apple isn’t the next Microsoft, you see. Apple is not the next anything because the role it aspires to transcends anything imaginable by Microsoft, ever. Google is the next Microsoft, so Google is seen by Ballmer as the immediate threat — the one he has a hope in hell of actually doing something about.

In the end Apple will probably beat both Google and Microsoft, but that’s not a story for today.

Were Google to buy Skype they’d convert those 663 million Skype subscriptions to Google Voice and Gmail and in a swoop make parts of Yahoo and MSN irrelevant. They’d build a brilliant Skype client right into the DNA of Android, draining telco revenue and maybe killing smaller players like Windows Phone. They’d cut deals with equipment makers like Cisco (Linksys) and NetGear and steal voice revenue from telcos and cable companies alike.  That’s all Redmondesque behavior and if anyone is going to be behaving that way, Ballmer feels, it had darned well better be Redmond.

If Microsoft is to continue to grow and have an existence post-PC it has to be first or second in the mobile market, Ballmer knows that. Buying Skype doesn’t guarantee Microsoft that success, but NOT buying Skype would have practically guaranteed Microsoft’s failure.

And the $8.5 billion price? That was effectively set by Google, not Microsoft. Ballmer would have paid anything for Skype. $8.5 billion is just the price at which Google feels it is better for them to build rather than buy.

So look for heavy activity in this space as Microsoft assimilates and Google constructs. More acquisitions will come for both companies along with any number of strategic realignments. But remember that neither is actually in control. The conclusion is not only far from certain, there’s still a chance that neither company will dominate.

This is not an end-game, not yet.

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Whether at the casino or the race track, the house always wins. That’s the way it has always been, too, with Internet advertising. Nearly all Internet ad dollars are spent in two ways: 1) buying ads from advertising networks whether that network is Google or Yahoo or even IDGTechNet, which sells space on this rag, or; 2) buying search terms — the right to have your ad shown every time someone searches on the word hermaphrodite, for example. Network profit in those transactions comes from arbitrage — buying low and selling high. But what if there was a more efficient way to buy and sell Internet ads? As of this morning it looks like there is a better way called Clickochet (for Click Richochet), the first ad trading network.

Clickochet is the baby of my old friend Paul Tyma and I have no financial or other interest in the product or the company. It’s just something cool to write about. I want you to know about it because it is different, probably a lot more efficient than competing solutions, and it might just change the world.

Paul is a great programmer who spent a number of years working as a senior developer at Google where his major achievement was a major rewrite of Gmail. He is also the author of Mailinator, one of the first and best anonymous e-mail services. But the idea for Clickochet sprang not from anything at Google, but from a Christmas gift Paul gave to his girlfriend Tanna, who runs a celebrity gossip blog called StarSnarks.com.

“She started it last fall and is pretty passionate about it,” Paul explained. “At some point she put up AdSense on the site and, no kidding, was making about five cents a day. She didn’t have a ton of traffic so it wasn’t terribly surprising. As a Christmas gift I bought her $100 worth of AdWords to help her get traffic. With no exaggeration this campaign lasted three days and yielded a total of 100 clicks. If you do the math, I successfully turned $100 into about 15 cents by converting to and from ad impressions.”

Ad networks work by selling ads, but if you close the loop between publishing and advertising there is an exchange rate between money and ad impressions. Existing ad networks create a market inefficiency in that exchange to make money. Using Tanna’s example, above, $100 bought $0.15 worth of ad impressions. That’s $99.85 in gross profit there, some of which goes to web sites participating in the program but most goes straight into the massive fuel tanks of Eric Schmidt’s G5 jet.

That is the way Google makes so much frigging money.

All web sites want traffic, yet I won’t buy ads for cringely.com. Why not? Because it is a non-economical transaction. The only revenue I get from this site is from ads, but as the example above shows it would be insane for me to buy ads to sell ads. That’s a perpetual motion machine and perpetual motion machines are always defeated by friction — in this case the friction of the ad network’s revenue cut. This is the market inefficiency that ad networks introduce. Ad networks provide value in other ways, but this closed-loop is not it.

It might make sense to buy ads for this site if I was offering more than just ideas. If I was selling diamonds or penis enlargement pills, okay, but buying ads just to sell ads is a fool’s game. As always, though, there are plenty of fools.

That’s when Paul came up with the idea of trading ad impressions. Tanna could show an ad for other small sites like hers and those other small sites could show her ad. It’s like a link exchange but way smarter because it isn’t just for Search Engine Optimization (SEO). It’s an ad trading network.

Clickochet is free, social, and tied to Facebook and Twitter. Clickochet is a social ad community for web site owners like me for whom buying ads doesn’t make economic sense.

“I realized right away that ad-for-ad didn’t exactly work,” Paul said. “First, when you show a normal text banner ad, you’re not just showing one ad — you are showing three. There are three text ads inside a 728×90 banner ad creative. I can pass that multiplier back to the Clickochet member. So to start, if Tanna shows 1000 banners in one day, I can show 3000 of her smaller ads across the network.”

Enter at this point the inevitable honking-big algorithm to make this all work, because there are many factors that come into play when doing transactions like this — factors like ad placement, ad quality, and even my reputation as a journalist — to determine the exchange rate for each ad. So instead of taking the traditional ad network route of converting clicks directly into dollars (CPM), Clickochet converts ad impressions into virtual currency.

Here’s where it gets very geeky and leaves traditional ad networks in the dust, because where a DoubleClick would take the money and run, Clickochet introduces a clever multiplicative effect.

On Tanna’s blog right now she’s showing a skyscraper containing five ad-equivalents. So showing one ad on Starsnarks could get up to five ads for her site showing on the network. She can get more out than she puts in.

There are 40 billion webpages in Google’s index, almost none of which make a profit by selling ads. Clickochet is, in some respects, an ad network for the long tail — the 39 billion web pages where participating in the present monetary ad system makes little sense. For those pages gaining traffic is important and forgoing nickel-a-day ad revenue is painless.

Clickochet removes the market inefficiency that ad networks create to make money. There are two facets to that inefficiency. One is money: the networks take their cut. But the other is time. If you took your AdSense money and paid into AdWords with it you’d be delayed 30 days because Google waits that long to pay and so do all the other networks. You finance Google. But Clickochet is an instant transaction. The moment you get an ad impression, you can configure the system to either bank the credits, or spend them immediately. Show an ad on your site, and 3 of your smaller ads show nearly instantly elsewhere on the network.

And unlike the $100 AdWords campaign Paul bought for Tanna, a Clickochet campaign runs indefinitely. You get out of the system only what you put in, but on a perpetual basis. If Tanna is only putting 1000 ad impressions a day into the system, she won’t get 1000 new users overnight, but will increase her traffic over time.

Because Clickochet converts ad impressions into virtual currency, you can save them instead of spending them right away. Say you are launching a new product or even a new company in six months. You can run ads on your knitting blog, bank the credits, then spend all your money in a big ad blast when the product or company is ready to go. Your friends and family investors can even pay you in ad impressions if they like.

Here’s another even more subtle effect. I have a link on this site for portraitquilts.com, which is run by my little sister. She wants the link mainly for Search Engine Optimization but doesn’t mind if you buy a quilt or a pillow with Grandma’s picture on it (or Elvis’s). I get a lot of traffic here, which is good for Sis to some extent, but my readership is also very stable. The same people keep coming back week after week after week. Eventually you’ll stop clicking on that quilt link and my good brother brownie points will cease to accumulate. The link will go stale as advertising, if it hasn’t already.

With Clickochet, however, I could distribute ads for my sister’s site elsewhere on the ad network — perhaps even on sites more relevant to photo quilts than this blog. I can directly convert my ad impressions into my sister’s. To be fair, Google would let me do this too — make money off cringely.com and buy ads for portraitquilts.com — but I’d never do that because it would be a losing proposition.

Clickochet is a great idea and since it is coming from a great developer I’m pretty sure it will work technically. But can Clickochet gain critical mass? That’s the problem faced by all new networks: they need lots of traffic to succeed but, absent some viral effect they don’t have any traffic to start. PayPal famously handled that simply by sending people money, but most networks can’t afford that gimmick so they die. What makes Clickochet any different?

The clever answer here is that Clickochet may well have all the mass it needs to start, courtesy of Paul’s other site — Mailinator.com.

“I’m doing a virtual economic stimulus,” Paul explained “I’m injecting Mailinator’s several hundred thousand ad impressions into the system every day, without taking any out. Active users could get a lot of free ad impressions.”

Mailinator’s ad inventory allows Clickochet on its first day (today) to start where it might otherwise be a week or a month into viral growth. Paul hopes that’s past the most likely failure point.

Yeah, but how does Clickochet expect to make money?

Initially it will be as a cheaper competitor to AdWords. Many sites will find this to be a new (and cheap) venue for advertising. They will simply buy ads on the network just as they would through Google. But where the term “mesothelioma” costs about $50 on AdWords, it could be much cheaper on Clickochet.

“We’ll level the cost of ads, ” says Paul. “This won’t help with cheap search terms but creates a new outlet for currently expensive ones. With the right ad sales team in place what percent of that market could we capture?”

We should all want Clickochet to succeed just the same way we want Southwest Airlines to start serving our local airport — because it will drive down the profit margins for all ad networks, increasing transparency and efficiency and saving money for us all.

The house will still win, but their profits won’t be so obscene at our expense.

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A few months ago I wrote a column giving advice to Larry Page when it was announced that he would be taking-over once again as CEO of Google. Not that Google is especially in trouble, but it is a big job getting 50,000 feet marching in the same direction. In order to make that happen I urged Larry to create startups within Google. And sure enough, as he took over the top job last week and started announcing changes, one of the most radical was something very similar to the “five guys in a rented apartment” scheme I had proposed. Who knows, maybe Larry reads this rag, but probably not.

While I say Google isn’t in trouble, that doesn’t mean the company isn’t stuck. Google is very stuck. Like any successful and mature tech enterprise they are very adept at leveraging market advantages. PageRank, AdWords, AdSense are the big money-makers still. Everything else — everything else — is a page view generator and nothing else. Gmail, all the web apps, YouTube — all they are for is generating page views and displaying ads. There hasn’t been a successful new business at Google for more than a decade (no, Gmail is not a business, nor is Android). So Google is still a fabulously successful enterprise and great at making money, but it is a stuck very successful enterprise.

Google hasn’t shown it is very good at inventing new businesses internally and they aren’t good, either, at buying businesses externally. Name one business Google has purchased and taken to a new level of greatness. They tend to buy companies for the people and then throw away or forget the technology.  Name one CEO or CTO hired by Google with an acquisition who is punching out products today. It can’t be done. Graham Spencer, Rohit Khare, Max Levchin just to mention three: what happened to them?

They disappeared. I’m sure they are plenty busy with this and that, but they are also invisible.

So Larry Page has his work cut out for him and I commend him on his first week on the new job. Streamlining management, making Google’s social business a priority for everyone, coming up with new ways for Googlers to start their own businesses inside the company — that’s all great. But it isn’t enough.

Take that internal startup program, whatever it is being called. In principle it is a great idea, but the implementation is flawed. The internal startup founders, for example, are given two years to make their business work — two years before they have to deliver anything. That’s crazy.

Maybe it takes two years for Google to delivery anything, but Google is now a big stupid company with poor communication skills to boot — in many ways a worse Microsoft than Microsoft. A startup that hits its first deadline at 24 months is a startup that is over-capitalized and too lacking in fear.

Listen, these Google engineers with their startups will have already been thinking about their idea for months or years before they ever submit it to management. They need to deliver a prototype in two months, a solid beta product in six months, and have a full release in 9-12 months, tops. After all, they aren’t spending any time at all looking for money, and that’s what startup CEOs do probably half of their time.

Giving them two years is saying the engineers should take a year on the beach first, then get to work.

And if the startup idea fails then the Googlers working on it should fail, too. They should be fired.  Now there’s a proper incentive to succeed, not this fantasy startup thing.

Maybe Larry has forgotten all this, maybe he’s just slow, but he’s also wrong. This internal startup program may well keep people from leaving Google for awhile, but it won’t generate many new businesses, because it creates the wrong atmosphere — one that actually encourages failure.

But at least it is a step in the right direction.

Now what, Larry?

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My last column was about Eric Schmidt losing his CEO job at Google and how that company’s failed bid for GroupOn may have been a factor in Schmidt’s demise.  Weep not for Eric, who lasted in the CEO position for 10 years and earned $5.6 billion, which puts every other U.S. CEO to shame, even Steve Jobs. It’s interesting to consider Schmidt’s career arc and how he got where he is (isn’t?) today.

Eric Schmidt started his post-academic work life at Sun Microsystems where he loved all the smart people but was ultimately frustrated by management that he felt was simply not as smart as he.  Remember Scott McNealy was in charge of Sun when Schmidt left and McNealy rightly admitted that Sun’s 1990s server ascendancy with the Internet bubble was a happy accident as was Java.

Schmidt moved-on to Novell, another company filled with smart people but also a company in crisis or they never would have considered a non-Mormon for CEO.  There he slammed into a culture with completely different values, one where he was ineffectual because as an outsider he simply never got it.  Schmidt came away from Novell determined that the best way to find a suitable culture for his brilliance was by building it himself.

When Andy Bechtolscheim introduced Eric to Google co-founders Larry Page and Sergy Brin, Eric quickly saw this as his chance to create another Sun from scratch with himself as CEO while avoiding the entrenched cultural problems he had faced at Novell because almost everyone would be a new-hire.  That was 24,000 Google employees ago, so what we see in Google today is definitely a reflection of Schmidt — an intellectually curious but not especially passionate outfit.

I believe it is this lack of passion that ultimately came to hurt Schmidt at Google.

Is this likely to change with Larry Page as CEO? I think it will a bit. Page is more passionate than Schmidt. His view is less stratospheric and he allows himself to be a little more vulnerable.  But this very vulnerability will be his downfall because most of what he does isn’t likely to succeed and that will tell on Page very quickly.

How long again did Jerry Yang last as CEO of Yahoo?

Now to GroupOn, which recently spurned a reported $6 billion buy-out bid from Google. I posed the idea in my last column that $6 billion was too much for GroupOn as a company that seems to have no proprietary (and therefore protectable) technology and a lot of emerging direct competitors.

Then I read this week an excellent paper by the very clever Ahmadali Arabshahi that analyzes the GroupOn business model showing why be believes it is such a perfect fit for Google.  Remember my point wasn’t that the merger was a bad fit, just that it was too expensive and Google should instead build it’s own GroupOn-type service I called GoogleOn, which they now appear to be in the very process of doing.
Ahmadali sees synergy for Google with GroupOn’s Chicago-based sales force.  But he sees even greater potential in what Ahmadali calls “price discovery” — Google’s ability to use what it knows about our consumer behavior right down to MAC addresses and gmail content to individually price each daily offer so the optimal number of us accept its terms.  Remember that’s the basis of a GroupOn — a substantial discount on some local good or service offered for only one day and to be paid for up-front.

The weak spot in GroupOn’s business model, as Ahmadali notes, is that it is hard to scale a single offer per market if you aren’t selling exactly what that market wants at exactly the price it is willing to pay. He thinks the algorithm jockeys of Google could optimize GroupOn and make it even more of a commercial juggernaut.

Against this my friend Ed Kohler from Minnesota raises some very well-informed concerns. The GroupOn sales force may be over-rated, Ed thinks, but more importantly the GroupOn deals aren’t even as good as can be found on sites like restaurants.com.

I didn’t know that, did you?

Add to this the fact that a small percentage of GroupOns are paid-for but never redeemed (the company and its partners surely count on this for substantial extra profit) that GroupOn risks alienating we normally docile consumers.  We may be stupid but eventually we catch-on and GroupOn, having turned-down Google’s $6 billion, might shortly fade as just another Internet fad.

I come down somewhere in the middle of this argument, less concerned about either Google or GroupOn and more concerned about, frankly, me.  This is an old story.  I wrote a column years ago at pbs.org arguing that pages like this could be easily paid for not by advertising but by readers throwing coins in an electronic tip jar. The very next week PayPal invented PayPal Donate to solve this problem (I still have the e-mail from PayPal thanking me for the idea) but PBS would never let me use it.  Time to start thinking again.

I believe there’s a logical extension of the GroupOn business model to almost any affinity group, an example of which could be the readers of this rag.  What if I eliminated ads entirely and replaced them with a quarterly chance to buy something at a huge volume discount?  It would have to be something most of us would like to have and the discount would have to be very real (you tell me what that would be).

If a few thousand of us were captivated by the offer this space could be easily sustained ad-free.  It’s an idea I have toyed with in many forms for the last couple years. Not long ago I came up with the idea for a new form-factor PC I thought could serve as the first offer. I’d sell them under the CringeCo label, I thought, though they’d be made, like everything else, somewhere in Asia.

Alas what I thought I’d invented was essentially an iPad. I had a couple advantages but not enough to really compete, so the offer never happened.  Yet the business model I think could still be a success for mid-size web pages like mine.

Let a thousand GroupOns grow.

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No, Eric Schmidt didn’t step down from being CEO of Google to take Steve Jobs’s position at Apple. I’m fairly certain Schmidt was demoted. Or if he wasn’t, then he should have been.

From a strict business perspective I suppose it’s ridiculous to criticize Schmidt’s performance at Google, but that won’t stop me. The guy has done a fabulous job of optimizing search and web advertising but nearly everything else he and Google have done has been a failure. What else does Google make money from other than search and ads?

Nothing.

Yeah, but YouTube is almost profitable, right?

Hardly. While YouTube may be operating at near break-even that completely ignores the minimum $5 billion sunk and lost in the video sharing venture over the last several years. YouTube is still years from breaking-even on a net-net basis.

But the real killer for Eric Schmidt — the bonehead move that would have gotten him fired had I been on the board — was that $6 billion offer for GroupOn.

Here’s what Google could have done — should have done. First, take four top engineers and set them up like a startup in a rented apartment, denying them any access to the Googleplex. No free massages and definitely no unlimited Froot Loops. Google has grown to the point where it is virtually impossible to get anything done. So just like IBM did with the PC, a GroupOn clone would have to be done as a completely separate renegade operation. Four engineers, two months, and GoogleOn would be ready to go.

Then simply pay every adult in America $10 to join.

That’s about 100 million members or $1 billion. See, I saved Google five billion dollars.

It’s actually even better than that since GroupOn has only 50 million members.

Buying companies yields far more instant advantage than building them, I know. In Groupon’s case Google would get effectively irrelevant, copyable technology along with their entire user base. But $6 billion? Really?

My plan is way better.

Trying stuff that “doesn’t work” until “something does” is awesome. But seriously, when will the “something does” part begin for Google? The company is so financially successful because of its one trick, but at some point even at Google there is ultimately someone to blame. In this case that’s Eric, not so much for offering GroupOn $6 billion, but for getting turned down. The offer stinks of desperation and impotence. And to be rejected makes it even worse.

We can definitely say Eric did not screw-up search, but can we say anything else? Remember when Microsoft “missed” the internet? Well Google “missed” the Facebook.

Now understand that for all my complaints Google is going nowhere but up, with the economy slowly recovering and with that Internet advertising. But I’d say Eric had his shot. Unfortunately Larry Page probably isn’t the hammer Google needs, either. Google has super people but a lot of them seem to be in a rut. If Larry could have changed that, wouldn’t he have already done so?

I don’t know who should be the next CEO of Google, but I know who I’d hire to be the next head of Google HR.

Yahoo’s Carol Bartz.