So Google’s a Zen Master in addition to not being evil according to a column by the NYTimes Steve Lohr today . Here’s Lohr’s thesis - Microsoft was the master practitioner of network effects. It realized that more users led to more applications which led to more users and that users and developers then couldn’t switch from this now essential technology. Google is somehow different, though Lohr quotes enough contradictory sources that its not clear where he ends up. Google’s chief economist says its advantage is from learning-by-doing and NYU’s Michael Katz says “[i]t would be a lot easier for people to walk away from Google” than Microsoft. Other commentators seem to have told Lohr that Google really does have lots of network effects though perhaps not precisely the same kind Microsoft has.

There’s lots missing in this analysis and claims that aren’t quite right.

Let’s begin with Microsoft’s secret sauce. Sure, Gates wisely recognized the importance of getting people to write applications, but that was hardly original. Apple figured that out after the success of the first spreadsheet program ignited sales and had the first “evangelist”—Guy Kawasaki who stoked the fires with developers. Microsoft’s genius was recognizing the importance of low prices. They priced their software developer kits much lower than did Apple and spent much more effort in getting developers on board. Most importantly, they priced their operating system really low and promoted competition in hardware which in turn got hardware prices really low. The result: PCs with Microsoft’s operating systems were far less expensive than Apple’s. That’s what enabled Microsoft to get stronger positive feedback effects than Apple and to gain share. It was brilliant and these low-price computers and software provided tremendous benefits to consumers and businesses and mucho wealth to Microsoft’s shareholders.

Google’s secret sauce is based on network effects too, although they are more complicated. (See The Role of Economics in Online Advertising, David Evans, January 2008 for a detailed analysis.) But in the end searchers help Google get advertisers who then help Google get more searchers. The killer aspect of Google is the auction though—Google is able to engage in essentially perfect price discrimination and thereby extract the full value under the advertiser demand curve; the lack of transparency people complain about is partly so advertisers can’t game the auction. On top of this, though, Google is using precisely the same multi-sided platform model that Microsoft did. It is exposing APIs in its platform, it is encouraging developers to write applications, and it is requiring those developers to let it insert advertising. A lot of the stuff in Lohr’s article about how easy it is to switch from Google strikes me as rather overstated—online advertisers can’t easily switch from Google search to Yahoo or MSN search because there aren’t many eyeballs there (and in fact they don’t switch despite the fact the prices are a lot lower off of Google); a search engine that wants to beat Google has a long haul in getting enough searchers to attract enough of these advertisers. And Google not surprisingly makes it difficult for advertisers and users to use alternative technology (a topic for another day).

So is Google the Zen Master? Too early to say. Microsoft has had two massive hits: one in operating systems and the other in desk-top applications which has enabled it to become successful in a wide swath of the IT sector. Google has had one: Google AdWords which has enabled it to become the king of the hill in search-based advertising—an important but rather narrow business. I don’t think Google gets its Zen Master diploma (belt, hat, or whatever) until it demonstrates that it can replicate its hit in search in other parts of the advertising business or leverage its success in advertising to move into other areas.