Sundar Pichai: There Is No Innovator's Dilemma
If Google is in fact becoming a victim of its own success, it doesn't seem to be following the path Disruption Theory would suggest.
Have you read The Innovator's Dilemma?
That’s what Alphabet CEO Sundar Pichai was asked last weekend, one minute into his interview with David Friedberg on the All-In Podcast.
You're at a pivotal moment in the company's history today. Is Google being disrupted?
Friedberg did an awesome job running the interview, and I’ll try to break down some of the comments made by Pichai in future posts. For now, though, I just wanted to address the Innovator's Dilemma angle. I feel like it is getting a little funny at this point.
At the heart of the dilemma lies the question of allocating resources between an existing dominant technology and a new, raw and uncertain one. As it is easier to model the returns on investment in the former, incumbents often fail to envision how quickly truly disruptive technologies could improve; they therefore choose to focus on marginally improving their existing products, and fail to invest in the new technology due to its currently-inferior attributes. That leaves an opening for an upstart to ride the disruptive wave. By the time the incumbent realizes how good the disruptive technology has become – it is usually too late, and the leading position was lost.
Think of Steve Ballmer of Microsoft laughing at the first iPhone ($500, haha, and it doesn’t even have a keyboard), or Larry Ellison of Oracle bashing the cloud in 2009. This type of reaction gave Apple and Amazon, respectively, the opportunities to disrupt the PC and IT industries.
The first thing I published around here was a Warren Buffett disruption story: for years Buffett had dismissed Progressive’s use of telematics in car insurance underwriting, until – almost a decade later – he admitted that it cost GEICO its lead (see: Warren Buffett’s Blind Spot). My article about Palo Alto Networks disrupting Check Point in network security quoted Gil Shwed, Check Point’s CEO, downplaying Palo Alto in 2012.
Have we seen Sundar Pichai laughing or bashing or dismissing or downplaying OpenAI?
Clayton Christensen’s book was first published in 1997, merely ten years before the onset of the cloud and smartphones. Disruption Theory wasn’t as widespread back in 2010 as it is today; that’s why no interviewer has ever asked if Steve Ballmer had read The Innovator’s Dilemma, nor has anyone asked Larry Ellison if Oracle is going through a disruption.
A common narrative today (“talk of the town”, as Friedberg put it) is that Google would be slow to roll out AI-based products and cannibalize its phenomenal Search advertising business. That paralysis would leave the opening for OpenAI to take over Google’s user base through its ability to focus solely on ChatGPT.
It does sound like a compelling argument, but, I’m sorry – for this scenario to play out, Pichai should be saying things like “what is this AI nonsense”, “old Google Search was always using AI”, or “$200/month and it doesn’t even embed Maps or pull data from your Gmail”.
That, however, is not what’s going on here; Google, unlike Microsoft of the Ballmer era, wasn’t paralyzed by the innovator’s dilemma during the shift to mobile, and doesn’t seem to be today. This is actually creating an absurd dynamic, where Google is saying something like “we are pushing as hard as we can on AI, advertising will figure itself out down the road”, but the general sentiment is still “oh boy, they care too much about their ad revenue, they’re going to let AI wash them over”.
Google probably had indeed been affected by the innovator’s dilemma in early 2022, when it was, according to reports, testing LaMDA – a ChatGPT-like tool – internally, rather than releasing it to the public; in hindsight, incorporating LaMDA into Search could have preempted the ChatGPT moment of November 2022. That never happened, though, probably due to 2022-Google being too cautious around its dominant and profitable Search product.
But that was pre-ChatGPT Google; the pace at which Google has recently been transforming its core product makes it seem like Google’s biggest worry is losing the AI race, rather than losing some near-term Search profits. There were no guardrails preventing the Knowledge Panels team from cannibalizing the classic ten-blue-links search results page a decade ago, and so I doubt that the Generative Search Experiences or Gemini teams are being held back.
That was basically Pichai’s message, after discussing initiatives such as AI Overviews and AI Mode in Search:
I think the dilemma only exists if you treat it as a dilemma, right? Like, you know, say for me all along in technology, you have these massive periods of innovation and you lean into it as hard as you can. It's the only way to do it.
When mobile came, everyone was [saying] you're not going to have the real estate, how will the ads work, all that stuff. Mobile was a transition which ended up working great.
I can give great examples, right? TikTok has come in, YouTube has thrived since the moment TikTok has come in, right? And it was a whole new format. We did shorts. When we launched shorts, shorts absolutely didn't monetize anywhere near long form, but we just leaned into the user experience and over time when we figured out monetization to follow.
So to me, you don't think about it as a dilemma, because you have to innovate to stay ahead and you kind of lean in that direction.
A key pillar of Disruption Theory is that incumbents fail to see how transformative a new and disruptive technology is going to be; is this what’s happening here?
It might very well be the case that OpenAI is able to eclipse Google Search. But it would have to play out in a different way. While it’s hard to make predictions about what Google’s market position is going to look like on the other side of the AI tornado, the one thing that seems certain is that it wouldn’t happen due to Google committing the worst possible sin of Silicon Valley: clinging too hard onto its existing successful business model, and failing to capture the next paradigm shift. While there might have been complacency prior to ChatGPT, this is clearly no longer the case today; perhaps it’s the analysts who are being complacent, clinging onto a theory that doesn’t seem to be working in this case.
Google might still lose – and maybe already have lost, due to the 2022 thumb-sucking – but no dilemma currently seems to undermine its attempt to win in AI.
(I recommend watching the full interview. It may be found here.)
Disclosure: Nothing here is investment advice. I own shares of Alphabet, and may sell at any time without notice.
Excellent article Matan! I watched the interview and have to agree with you that Google is doing everything is can to bring its business into the AI age.