The Google Model Is Crumbling

Technology is continuing to advance, accelerating in some areas, such as cryptography and sensors, and bogging down in others, such as semiconductors and “clean energy.” We don’t even have robust distributed power.

I completely agree with Peter Thiel on the essential thesis that technological progress is not inevitable. It’s the product of human creativity, which always comes as a surprise to us. If creativity didn’t come as a surprise, we wouldn’t need it.

I like to tell the story that Margaret Mead told, of remote mariner tribes that once made their living building streamlined canoes to go out and catch fish in huge volumes, but over time just forgot how to make canoes. They forgot the crucial factor in their prosperity.

When Mead found them, they were sitting on the beaches gazing glumly out at the ocean. They were on a path to extinction with no idea that streamlined canoes were the solution to their problem.

We’re still at risk from this kind of amnesia. We’ve forgotten the real entrepreneurial sources of creativity and progress. In my last book, The Scandal of Money, I talk about governments having forgotten what money is for and how it works. As a result, they’re issuing more and more of it, on the assumption that somehow money constitutes wealth, instead of realizing that money measures wealth.

Now, the biggest industry in the world economy is the $5.1 trillion per day currency-trading carnival, which, in the end, doesn’t even yield stable currencies. It doesn’t even provide a measuring stick for entrepreneurial activities. So I think it’s perfectly possible for people to blind themselves to the real sources of their progress and prosperity.

The U.S. today would be trillions of dollars wealthier if the economy had only grown at 3% per year during the post-financial crisis recovery. That’s been the typical amount of growth we’ve seen after past recessions.

Since the 1990s there has been a 50% drop in the number of public companies, and a 50% drop in the number of shares, plus a real dearth in IPOs — a 90% drop in the average annual number of IPOs. So-called Communist China now has twice as many IPOs as we do, and a smaller government measured by share of GDP.

We’re not making entrepreneurial progress at the rate we did in the 1980s and 1990s. We’re not living in an age of boldness and abundance, but in an age of retrenchment, shrinking horizons and careful rearrangements of existing resources. A lot of it is epitomized by this whole idea that unless human beings stop advancing, the climate’s going to collapse on us.

The climate change paralysis has been very destructive, not only to our national economy but particularly to Silicon Valley. Every time I find a company that’s doing something right, I discover a peculiar feature of its technology that’s designed to stop it from emitting carbon dioxide.

And that feature twists the technology into a pretzel, making it less useful and less promising. Take Google. It’s making an elaborate effort to make all its massive data centers around the world “carbon-neutral.” They’re all linked up to various solar panels or windmills. That’s some archaic way to produce energy!

For the last ten years we’ve actually been moving backward in some crucial measures. And from a market perspective, it’s not good to have most of the stock market’s advance be in five companies, which buy back their own stock and buy up the shares of their rivals. I’m talking about Google, Apple, Facebook, especially when some of their basic business models are fundamentally flawed.

I was in China recently. Although China has reactionary politics, it is becoming incredibly technologically creative, producing all sorts of interesting new technologies and projects.
While there, I saw companies like Ten Cent and Ali Baba and Bai Du that followed the Google model. But they actually know how to collect money from their customers.

These Chinese companies collect only 10-15% of their revenues from advertising. They collect the rest through various ingenious ways of micropayments and automatic payment mechanisms that are brilliant and give them actual customers who pay them regularly for the goods and services that they provide.

Google, meanwhile, collects 95% of its revenues from advertisers, producing advertisements that, most of the time, nobody wants to see. It’s just fundamentally a model that won’t prevail, which Facebook is also following.

But Google’s paradigm is ending because it avoids the challenge of security across the internet by giving away most of its products for free, and financing itself with an ingenious advertising strategy.

Google has a centralized security model. It takes all your data and hides it behind firewalls to defend against hackers, who nonetheless manage to penetrate the defenses. It’s an obsolete security model.

A new internet architecture is emerging. It’s providing alternatives to today’s porous, insecure internet, in which Equifax or Yahoo can lose hundreds of millions of items of personal data and the reaction of the big five internet leviathan is merely to demand more passwords.

They make our computers increasingly inaccessible to us but not to the pop-up malware viruses called “ads.” All of this is being remedied through the new cryptocurrency movement that began in 2009.

In fact, blockchain is much bigger than cryptocurrency.

The blockchain field is seeing an amazing explosion of creativity, entirely comparable to the dot-com eruption of the 1990s.

So, yes, the foundations for an era of very rapid growth exist, which is what my book Life After Google is all about.

It will similarly have a lot of losers like Netscape, as well as obscure, prospective giants like Amazon and yes, Google today.

But Google’s days are numbered. A new internet is coming, and so is the renewal of capitalism.


George Gilder
for The Daily Reckoning

The Daily Reckoning