Monday, April 04, 2011

Google's mother-of-all business model

Google makes its money from search. We all know that. But how many of us know the crushing blow that Google is delivering to several small and big companies in several industries? We are not speaking of the rude shocks that thousands of small businesses get from displacement from their usual place in search listings when Google tweaks its search engine algorithm. More ...

Microsoft grew big and rich on the "you pay me for using my products" business model. The Open Source movement tried to pull the rug from under Microsoft's feet with the "you need not pay me anything to use my products" model. Microsoft fought back through its IE browser, offering it for free, when competitors like Netscape tried to make money from selling their product. 
However, Google is taking it much further. It is creating the "I will pay you to use my products" or the less-than-free business model. One that no one can fight with. Why will anyone want to buy a Rs.40 two-litre bottle of Coke when Pepsi is offering you Rs.2 for using an equivalent bottle of its product? 
AdSense was the beginning of the model: if you allowed Google to place its ads on your websites, it would pay you a part of the revenues generated from the clicks generated by the ads on your webpages. In effect, they used your website as a hoarding site for a share of the revenue generated by those viewing the hoarding. Even while they were perfecting AdSense, they continued encouraging the "free" model in various ways. Some of these ways were, supporting the Open Source Movement, supporting the Mozilla and Apache Foundation, purchasing and later offering for free Picasa and YouTube,  and so on. 
It quietly extended the less-than-free business model through paying Firefox for searches initiated on Google using the top right box in the browser, offering the Google Desktop and Sketchup diagramming software for free, and in a dozen other ways.   
There is one unfortunate, innovative Singapore-based company called TomTom (a maker of on-board GPS devices for cars) that is living just above the tectonic plates that are reshaping the business landscape. And recent tectonic plate movements have shaken them. At first they fell "victim" to Microsoft's patent infringement suit that forced them to pay a license fee for simply continuing their product development efforts. Shrewd commentators commented that Microsoft had simply used TomTom as a "canary in the coal-mine" - to test the waters for aggressive legal action against Linux and the Free Software Foundation. 
But both, Microsoft and TomTom have been caught unawares by another plate shifting underneath TomTom - tired of the continual vulnerability to the data providers who provided GPS device makers the street-by-street directions powering their devices, in 2007, TomTom purchased Tele Atlas. Tele Atlas was one of the two companies that formed a cosy duopoly of street-level directions data. TomTom wanted it hard enough to spend $2.7 Bn on acquiring it. Very soon thereafter, Nokia inked a deal with Nav-Teq, the second company in the duopoly, buying it for $8.1 Bn. Then, it was rumoured that Google was looking to buy TomTom, but that did not happen. Google dropped Nav-Teq as a data provider in 2008 and continued with Tele Atlas alone. For one more year. In October, 2009, it dropped Tele Atlas too, and switched to its own combination of Google Earth and Google StreetView. Then, Google announced that street-by-street GPS directions would be available as a free navigation service on Android smartphones. This has short-circuited the entire business of companies such as TomTom which is now, once again, experiencing a tectonic plate shift under it, this time the "giant catfish under the sea" that Japanese believe are the cause of earthquakes, being Google. Google has also sent up its own satellite that can continually renew the images for Google StreetView and Google Earth.
Nokia's chief has gone on record saying that Nokia stands on a burning platform. They are already feeling the heat of the Android platform, which is another "free" product that has bagged the largest marketshare in smartphones in the US as of Feb 2011. The rise and rise of Android is doubtless  giving sleepless nights to Jobs at Apple, and to top managers at RIM and Microsoft too, besides Nokia. With over 200,000 apps, Android is burning the rubber, and creating a new business model: the "apps ecosystem" for mobile handsets and browsers. 
Giving away for free GMail, Blogger, Android, Chrome Browser and OS, Froogle, Google Docs and other bestsellers like Picasa, YouTube, SketchUp, Public Data Explorer, and the like - how can it benefit Google? 
The answer lies in Warren Buffet's analogy of the business being the castle, surrounded by unbreachable moats.  Google's search business is the castle; and all these free and less-than-free apps and products constitute the moat. Add to it the astute observation that Google has a low new product failure cost, and can hence almost endlessly experiment with offerings, and you have a relentless juggernaut that can continually innovate at near-zero costs. No matter what it costs others who get affected by Google's muscling in on "their territory". 
As I publish this entry comes the news that Google has bid $900 Million for Nortel's portfolio of 6,000 patents. An official Google Blog post says this: 
"as things stand today, one of a company’s best defenses against this kind of (dubious patent) litigation is (ironically) to have a formidable patent portfolio, as this helps maintain your freedom to develop new products and services. Google is a relatively young company, and although we have a growing number of patents, many of our competitors have larger portfolios given their longer histories. So after a lot of thought, we’ve decided to bid for Nortel’s patent portfolio in the company’s bankruptcy auction.
So Google could have well armed itself with an arsenal of patents that ensures their "freedom to operate".  Yet another element of the "unbreachable moat". 

I still think that Google is a good thing for the world. But I can understand the discomfort of businesses that feel the aftershocks of Google's movements.

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