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Originally published Monday, December 11, 2006 at 12:00 AM

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Google 2.0: From search engine to media powerhouse

Just a few months ago, investors wondered whether Google would have an Act 2. The novelty of search-based advertising had faded along with...

San Jose Mercury News

SAN JOSE, Calif. — Just a few months ago, investors wondered whether Google would have an Act 2.

The novelty of search-based advertising had faded along with triple-digit growth in quarterly revenues. Meanwhile, Google's strategy for releasing new products seemed incoherent.

No more.

Investors are cheering the emergence of Google 2.0, sending the share price of the search engine cum media powerhouse past $500 for the first time last month.

In addition to the leading search engine and the most lucrative online advertising business, the new Google is poised to deliver news, entertainment and business applications to any computer, phone or cool new gizmo that can connect to the Internet.

It is both big media and Microsoft rolled into one.

"We are busy building out the components of a new way of doing information on the Internet," Chief Executive Eric Schmidt said in an interview.

Strategy becomes clear

Google's $1.65 billion deal in October to buy YouTube, the most popular site for sharing online videos, crystallized the logic behind a muddle of corporate moves.

Among the other parts of Google 2.0 are Google's massive blogging service (Blogger), its free Web page creator (Google Page Creator) and its news aggregator (Google News).


Together, these products mimic the publishing functions of print journalism, while, more important, providing the company with new customers and new places to show them ads.

Other important pieces include the word-processing and spreadsheet services offered by Google Docs, along with productivity applications like Google Calendar and JotSpot, a newly acquired wiki company.

"The more we know about you, and I want to make clear this is with your permission, the more accurate the search results and the information results that we can give you," Schmidt said.

Not everyone is comfortable with the Mountain View, Calif., company's growing power. "Google has this imperial digital ambition that frightens me," said Jeffrey Chester, executive director of the Center for Digital Democracy, a Washington, D.C.-based nonprofit focused on maintaining media diversity and openness.

"Google: friend or foe?" former publisher and current Internet impresario John Battelle recently asked Arthur Sulzberger, chairman of The New York Times Co., during an annual summit of top executives, dubbed Web 2.0.

It's a question traditional media companies are asking themselves as Google 2.0 aggressively expands from auctioning advertising on the Internet to auctioning ads for radio, magazines and newspapers.

Sulzberger called Google "a competitor, a good competitor, but they are also a cooperator." He noted that Google is "now the largest single business partner of The Times." Last month Google began a three-month test selling advertising for 50 newspapers, including The Seattle Times.

"We are not convinced this offers significant upside to the industry," Brian Shipman, a publishing analyst for UBS Investment Research, wrote in a note that pointed out the Google-brokered ads could undercut regular ad prices.

Meanwhile, the offline moves of Google 2.0 are ringing alarm bells on Madison Avenue, where advertising deals are still sometimes conducted via fax machines.

"The fear with Google is it is so superefficient, so automated, who needs the agencies?" said Joe Mandese, editor in chief of MediaPost, an online publication that chronicles the media industry.

Microsoft, itself a convicted monopolist, has been warning that Google may soon have the power to fix the prices publishers receive. Without healthy competition, "Google will tell you exactly what you get to charge for ads," Microsoft CEO Steve Ballmer told the Mercury News.

Brewster Kahle, founder of the Internet Archive, said he is concerned that Google 2.0 could represent the first glimpse of a future dominated by a handful of giant companies whose control over vast computer networks lets them broker both digital advertising and access to digital content, possibly controlling what information and which ads users can easily locate online.

During the past six months, Google spent about $1.2 billion on data centers and other computer equipment.

Microsoft told Wall Street analysts it would need to spend an extra $500 million to compete with Google and Yahoo! Few other companies can afford to do that.

Threat to independents

"What I believe is threatening to people in many fields is that we will lose the independent distribution model of the Web," Kahle said. "That would be a horrible waste of 20 years of promising developments."

Google points out it has plenty of competition, both from giant companies like Microsoft and from a host of smaller players, such as specialized ad networks focused on specific industries, like automobiles.

"We welcome innovation that helps put people in touch with information and expands user choice," said Google spokesman Ricardo Reyes.

Smaller rivals say they are not afraid of the new Google. Henry Vogel, chief revenue officer of Quigo, which, like Google, delivers auction-based Internet advertising, said his company provides superior results for Web sites such as ABC News and ESPN while letting publishers retain control over their relationship with advertisers.

"Our transparent approach makes publishers more money," Vogel said.

Chester said consumers aren't prepared to deal with the sophisticated data collecting and mining that has become routine for Google, Microsoft and Yahoo!, as well as for smaller Internet companies.

Last month, the Center for Digital Democracy filed a complaint with the Federal Trade Commission, seeking an inquiry into online marketing and data-collection practices.

"I don't think one can trust Google, and I think the direction that Google is going in should send civil-liberty chills and privacy chills throughout the user community," Chester said. "Google 2.0 is simply a 21st-century version of one of the media giants."

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