Has Google Blundered with the Gmail Beta?

The traditional business model of webmail providers worked by squeezing the storage quotas of the free users of the webmail service, and forcing users to upgrade to a premium service. Someone at Google realized that earning money from webmail by selling premium services was always going to be a tough ask, and an alternative business model was needed. The idea he/she came up was to focus on pushing targeted ads to the users of the webmail service.

The idea is brilliant in its simplicity. All an email provider needs to do is to scan the message the user has asked to be displayed for keywords, and display some relevant ads along with it; the ad clicks come automatically.

While developing this idea the Google people also realized that the new business model did not depend on squeezing the storage quotas of the users. The people at Google calculated that storage quotas of 1GB and more can be offered without an inordinate amount of expense. A whole Gigabyte of storage space for webmail was almost unthinkable at the time Google conceived of the idea. It would have been a massive marketing coup for Google's new webmail service had the company offered such a storage quota to the mainstream user.

Google did combine the two big insights it had, and several other innovations into its Gmail service. Gmail seems to be everything the users want. It offers users a large storage quota, has excellent email search capabilities, and incorporates a number of usability enhancements such as threaded discussions, and labels for grouping emails. Unfortunately, Gmail is still in beta and the average person can't sign up for the service.

While Gmail is in beta its competitors are busy copying its features. The massive storage quota of Gmail must have really scared Yahoo and Hotmail, so this was the first thing they copied. As of now Yahoo is offering 100 MB quotas on its free email accounts, and Hotmail is offering 250 MB. This is quite a big change from the paltry 4 MB and 2 MB quotas Yahoo and Hotmail were offering previously.

Gmail's competition is not trying to beat Gmail, but is only interested in avoiding a mass exodus of users. The well-established webmail players understand that switching a primary email address is a non-trivial task for any user. A user has to inform all of his/her contacts of the new email address, and even after doing that email just keeps on coming at the old email address. By offering larger quotas Gmail's competition is trying to reduce the incentive of users to switch to Gmail. Gmail's competitors certainly won't stop at storage quotas; it is safe to assume that most of Gmail's innovations will be incorporated into competing webmail services even before Gmail comes out of beta.

Gmail's beta was most likely a poorly planned exercise in market research. Google was interested in monitoring the behavior of Gmail users, and collecting data about ad click rates, searching habits, storage use, etc.

Unfortunately, all of Google's data collection will be useless, as the typical Gmail beta-tester is likely to be much more loyal to Gmail than the typical user which signs up after the beta. When Gmail finally comes out of the beta, users will certainly sign up in droves, but many of these users will only use Gmail as just another email account. With all the catching up Gmail's competition is doing, users simply won't have sufficient incentive to make Gmail their primary email address. This will translate into less ad clicks, lower revenue, and less profitability for Gmail.

Had Google introduced Gmail without giving Gmail's competitors time to clone Gmail's functionality, a big fraction of web-mail users would have switched wholesale to Gmail. Gmail's competitors would have been caught unprepared. Many of them would have panicked and done stupid things to stem the exodus of users to Gmail. Fortunately for them, Gmail's beta gave everyone ample breathing room.

Companies do betas because they expect a beta-tested product to yield more profits: better products typically lead to more sales and revenue. Unfortunately, Gmail's beta has done more harm than good to Gmail's prospects, and thus has been contradictory to the goals of a beta.

Public betas are always a compromise between increasing the robustness of a product/service, and divulging product functionality and business plans. In some situations public betas are unavoidable. Microsoft has to release betas of Windows to developers, and a wide userbase in order to produce a usable version of Windows. By doing alphas and betas Microsoft is inviting its competitors to copy upcoming Windows functionality. In case of Longhorn, Linux developers are certainly picking and choosing functionality.

A lengthy beta makes sense for Longhorn as Linux developers will not be able to clone all of Longhorn's core functionality before Microsoft releases a final version. However, Gmail just doesn't have the kind of sophisticated functionality which requires years of development effort to duplicate. If Hotmail's creators had done what Google has done, there would be no Hotmail today. Other companies would have seen Hotmail's potential and introduced competing web-mail services to snag users before Hotmail could.

The most sensible course of action for Google was to do no beta or a very short beta. A couple of weeks of beta-testing would have sufficed for the level of functionality Gmail is offering. For market research, the company should have relied on some alternative means or preferably skipped the market research altogether. After all there aren't many startups who would delay their product 6 months to collect some questionable statistics.

Another option for Google was to do a limited beta, but do it in a way to mislead its competition. Google could have started the beta with a 10 MB storage quota for Gmail with the final release version of the service offering 1 GB. Of course, no one outside of Google was to be told of Google's intent to offer 1 GB in the final version of the service.

Unfortunately, the damage has been done, and these options are irrelevant to Google. Google can try to surprise its competitors by introducing significant new functionality in the final release of Gmail. But, the company seems to have played its best cards, and a radical revision of Gmail is unlikely.

Gmail has certainly transformed the web-mail scene, and it will be a definite success. However, Gmail could have done much much better, and there are some important lessons to be learned. Companies must keep in mind that there are drawbacks to betas and ignoring the drawbacks can have disastrous consequences.

by Usman Latif  [Aug 28, 2004]