Advertising is the vast majority of Google's revenue. How vast? AdWords alone accounts for 97% of Google's earnings. The strategic vulnerability of that position cannot possibly be overstated.
Along comes Facebook, which could (in theory, at least) roll out a perfectly competitive product to threaten AdWords. If social really does provide better context for advertising, and advertising within the world's prevailing social network is deemed superior to advertising within search, then Google is fucked. Some degree of 97% fucked, to be precise.
This is why Google's so feverishly obsessed with social in general, and Facebook in particular. They see this -- rightly so -- as no less than an existential threat. Now, their approach to the problem is up for debate. But the extent of the problem is, if anything, popularly underestimated.
While that helps explain why Google's social efforts are weak, it doesn't make the case that social is something Google needs.
What Google needs, in this case, is more information on its users, which is not a particularly social thing to need.
Say Google is approaching social as an information gathering problem, and Facebook is approaching social as a users-interacting problem, then who will always win social under those conditions?
"While that helps explain why Google's social efforts are weak, it doesn't make the case that social is something Google needs."
Actually, my intent was just the opposite: to explain why Google "needs" social (but not so much to explain why its efforts have been weak). That said, I think it does offer explanation for their weakness in social to date: they didn't really see it as a threat until it became one. It's very easy to see why Facebook's ad platform can be a threat to Google's ad platform in hindsight (i.e., right now), but it wasn't back when Facebook was first taking off. It's hard to blame Google for not seeing Facebook as an existential threat before it turned into one.
"Say Google is approaching social as an information gathering problem, and Facebook is approaching social as a users-interacting problem, then who will always win social under those conditions?"
For Google, it's not about winning social, per se; it's about winning advertising. Facebook is trying to win social. Google is trying to prevent social from devastating its ad platform, and at the moment, it seems to think that putting up a valiant fight to carve out a piece of social is the best solution to that problem. That's why Google thinks it "needs" social. It may or may not actually need to win social, but it needs to defend and improve its ad platform, and social is a big threat to that platform. Accordingly, I'd argue that Google's approach to social has been defensive, and not offensive. (Ironically, that may also explain its not being able to "get" social so far).
I think they are also split between trying to think of Facebook as doing an extension of their information gathering, ie social relationships add more data that we can use to sell you ads more effectively we need to do this, as against Facebook as a platform is a threat to the open web with search as a gateway. The first part is easier for them, especially as plus gives them some data from circles even if no one uses it. The only big platformy thing they have is youtube, and perhaps android, oh and orkut, but they dont really know how to compete with facebook, in the past they just tried to build attractive places on the open web.
The vulnerability of their business model was always obvious. What I don't understand, is why Google never attempted to enter new markets with different business models.
"What I don't understand, is why Google never attempted to enter new markets with different business models"
Google has always been attempting to enter new markets, but the new attempts amounted to a lot of moderately useful utilities, some questionably useful toys and curiosities, and a lot of misses. Mostly, the attempts seemed like random offshoots -- the products of a company that was supremely dominant in its position, flush with cash, and free to experiment in any way it so chose.
As I mentioned in a previous comment, it's very easy in hindsight to blame Google for having essentially rested on its laurels, squandering its lead and its position. And it's very easy to claim that certain threats (i.e., Facebook) were "always" obvious. They weren't. There were certainly some critical junctures at which Google should have focused its efforts on expansion in one or two directions. But Google was making attempts at expansion -- just not the right ones.
Harvard's Clayton Christensen famously described this situation as "The Innovator's Dilemma." There is a well-documented and almost axiomatic pattern, throughout history, of innovative companies rising to the top and then failing to predict who or what would eventually disrupt them. (If disruption were easily predictable, after all, it wouldn't be disruptive).
You don't seem to be differentiating between search ads and display ads, and it is search ads that comprise the majority of their revenue (where FB is more of a threat to their display ads).
I would argue that FB is a threat to their search ads, too, in the long run. And it's not too difficult to foresee some scenarios in which that's true.
At least Google seems to think so. (If they just thought FB was a threat to display ads, they probably wouldn't be making social such a huge, life-or-death deal).
Along comes Facebook, which could (in theory, at least) roll out a perfectly competitive product to threaten AdWords. If social really does provide better context for advertising, and advertising within the world's prevailing social network is deemed superior to advertising within search, then Google is fucked. Some degree of 97% fucked, to be precise.
This is why Google's so feverishly obsessed with social in general, and Facebook in particular. They see this -- rightly so -- as no less than an existential threat. Now, their approach to the problem is up for debate. But the extent of the problem is, if anything, popularly underestimated.