Google’s Strategy: My Simplistic View

  • Posted: 25 May 2010 02:26 AM

    Google Strategy: My Simplistic View

    1. Best in Search (Algorithms and Scale)
    2. Extend Market Position (old MSFT Strategy)
    3. Commoditize Software to Monetize Search (Free Software)
      -Platforms
          -Smartphones: Android (a demonstrative success)
          -Tablets (likely success due to similarity with Android OS)
          -Desktops/ Laptops: Chrome OS (to be released shortly)
          -TV (late fall introduction, 1st mover advantage?)
          -Application Platform built into all OS
            -games, books, magazines, applications, etc.
            -advertising within all applications
      -Internet Platform
          -YouTube (Video Broadcasting: 2 billion streams per day)
      -Tools (leader in cloud computing)
          -Chrome: Internet Browser (quickly gaining share)
          -Docs (future MS Office killer)
          -Email: Gmail
          -Calendar
          -Photos: Picassa
          -Navigation (already cannibalizing an entire industry)
          -Commerce: Google Checkout (no traction yet)
          -Numerous other Initiatives (Maps, Personal Medical Records, News, etc.)

    No company is in a position to offer all of these software services for free. No company is willing to compete with this strategy. Google can commoditize software. No one can commoditize search, because second best is unacceptable for the user. This strategy is both an insurance policy for their core business and an entry into ancillary revenue streams in all related spaces. Google will not try to monetize their software until they have reached critical mass and have a near monopoly in their space(s). They may choose a monetization strategy similar to Adobe. It is too speculative at this stage to outline their monetization strategy but they will eventually be in a position to monetize each beachfront. This is the pre-internet strategy MSFT used to become the largest technology company in the world. Google?s upside is much greater than Microsoft’s ever was because of the scale the internet enables. There is no other business strategy that has this kind of virtually limitless scale and operating leverage. The search is business is not yet mature, as advertising is still shifting to the web. Desktop computing is still growing and the tablet market is in its’ infancy. I expect Google’s bottom line growth to accelerate going forward before their future revenue streams kick in. In other words, their growth may be backloaded. Either way, this industry is far from mature and Google’s position is essentially unassailable.

    Competition:
      Microsoft:
          -Losing over 1 billion per quarter in an attempt compete in search. MSFT does not have the scale to generate the quality search results that Google?s size enables. A critical disadvantage.
          -MSFT?s major revenue streams are threatened by Google?s free strategy (Smartphone, Desktop and Tablet OS and Office Suite). They will collapse as a competitor once Google?s free strategy starts eating into their revenues.
      Apple:
          -Apple can continue to generate massive profits and growth by producing the best combination of hardware and software at a premium price as well as leading in innovation. Apple has/ had successfully beaten MSFT, and all other companies in the smartphone space because of the application store. (Ironically, in the same way that Microsoft had previously beat Apple on the desktop). Unfortunately, Apple?s proprietary OS strategy cannot win market share against Android?s free OS without a clear advantage in applications. Unfortunately, Apple?s first mover advantage was not fast enough.
      Facebook and Twitter:
          -Social is still missing from Google?s arsenal. It will be a slow path to monetization for both Facebook and Twitter (not unlike YouTube). The threat remains that some new social site will usurp them as Facebook did to MySpace. They are not a threat to Google?s search business as Google?s technology will remain superior because of their search algorithms and their scale.
          RIMM, PALM, NOK, YHOO- Irrelevant, for obvious reasons.

    GOOG: All this for about 14 times next years earnings (net of cash, YouTube and the Android/ Chrome platforms)!

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    Posted: 25 May 2010 02:40 AM #1

    jeffi - 25 May 2010 05:26 AM

    ... No company is in a position to offer all of these software services for free. No company is willing to compete with this strategy. Google can commoditize software. No one can commoditize search, because second best is unacceptable for the user ...

    You’ve forgotten about Baidu.  Don’t underestimate this Chinese company, whatever Google can do, they can do too at much lower cost.  Google search technology is not much superior to Baidu’s.  The weaknesses of any Chinese company are their poor marketing skills and unexciting design sense (those that appeal to Western Culture).  Given time, they would be able to learn that too, just like the Japanese, more recently the Korean.

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  • Posted: 25 May 2010 03:20 AM #2

    Mace - 25 May 2010 05:40 AM
    jeffi - 25 May 2010 05:26 AM

    ... No company is in a position to offer all of these software services for free. No company is willing to compete with this strategy. Google can commoditize software. No one can commoditize search, because second best is unacceptable for the user ...

    You’ve forgotten about Baidu.  Don’t underestimate this Chinese company, whatever Google can do, they can do too at much lower cost.  Google search technology is not much superior to Baidu’s.  The weaknesses of any Chinese company are their poor marketing skills and unexciting design sense (those that appeal to Western Culture).  Given time, they would be able to learn that too, just like the Japanese, more recently the Korean.

    I didn’t really forget. I just didn’t address them all. I wanted to go to sleep. That being said, and because I’m still up…

    Baidu will win in China and maybe parts of Asia. It’s my understanding that Google’s search algorithms are superior. Importantly, outside of China, Google has scale which enables better search results. Therefore, I do not believe BAIDU can beat Google outside of Asia. Importantly, Baidu cannot compete with Google’s initiatives outside of search. In sum, outside of China, it’s game over. On the other hand, China is a world unto itself. Therefore, they do and will continue to have a monster business. I would not short BAIDU.

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    Posted: 25 May 2010 04:01 AM #3

    jeffi - 25 May 2010 06:20 AM

    ...Therefore, I do not believe BAIDU can beat Google outside of Asia.  Importantly, Baidu cannot compete with Google’s initiatives outside of search. In sum, outside of China, it’s game over ...

    Ignore Baidu at your peril.  Baidu would be happy to be under Google’s radar.  With money and time, Baidu can build its scale and improve its algorithm.

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  • Posted: 25 May 2010 08:06 AM #4

    Frankly, I think search can be commoditized.  When was the last time you heard anybody remark about the quality of search?  Have you ever googled something and said “Wow, what a great search result!”  And if you ever did, was it in comparison with Bing?  People don’t generally make A-B comparisons between search engines, so where’s the “stick?”  Google has a toolbar and personal habit going for them, but I don’t think qualitative considerations w/regard to search really explain Google’s popularity.

         
  • Posted: 25 May 2010 08:46 AM #5

    Mercel - 25 May 2010 11:06 AM

    Frankly, I think search can be commoditized.  When was the last time you heard anybody remark about the quality of search?  Have you ever googled something and said “Wow, what a great search result!”  And if you ever did, was it in comparison with Bing?  People don’t generally make A-B comparisons between search engines, so where’s the “stick?”  Google has a toolbar and personal habit going for them, but I don’t think qualitative considerations w/regard to search really explain Google’s popularity.

    I see it differently. Outside of simple searches, it matters to the user. Google came after Yahoo and won for this reason. Google’s results are better. It matters to more people than not. The additional free software that Google provides also builds goodwill. Google’s brand is one of the strongest in the world, and will grow stronger with it’s intiatives.

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  • Posted: 25 May 2010 10:00 AM #6

    Jeffi:

    I appreciate your posting this content. I’ll take time to read through it all before commenting.

         
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    Posted: 25 May 2010 10:04 AM #7

    As a stock investor I find it difficult to get overly excited when I look at Googles stock chart compared to Apple.  Show me the money.  I have owned the stock for the last 5 yrs and it has not done much, reminds me of Microsoft.  Apple is much more focused and has proven they can make money at most of their business areas.  Google has yet to prove they can make money at anything other then search.  From a consumer perspective free sounds great, except free always comes with baggage.  I prefer to pay up front and know what I’m getting.  As far as investing,  Google has done nothing of late so I’m a bit skeptical although I do hold a small position.

         
  • Posted: 25 May 2010 11:06 AM #8

    pats - 25 May 2010 01:04 PM

    As a stock investor I find it difficult to get overly excited when I look at Googles stock chart compared to Apple.  Show me the money.  I have owned the stock for the last 5 yrs and it has not done much, reminds me of Microsoft.  Apple is much more focused and has proven they can make money at most of their business areas.  Google has yet to prove they can make money at anything other then search.  From a consumer perspective free sounds great, except free always comes with baggage.  I prefer to pay up front and know what I’m getting.  As far as investing,  Google has done nothing of late so I’m a bit skeptical although I do hold a small position.

    I believe the key to investing is to anticipate what is likely to unfold (be where the puck is going?). Timing is difficult. I may be too early. I don’t want to be too late. I want secular growth stories that I can hold for years and years. I want large cap stocks that can scale, preferably limitless, that leverage technology. I want large cap stocks that are broadly covered with high information flow. Apple and Google seem perfect. Google has more potential and leverage and a bigger moat with less competition. For the short term, because of the Ipad, Apple’s the sure thing.

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    Posted: 25 May 2010 12:42 PM #9

    Google and Facebook have been too flippant with user’s privacy.  Sooner or later, I’ll say goodbye to those two.  Facebook is the easiest to replace.  If Bing were to somehow become useful or Apple were to enter the search arena, Google stock goes under the way Internet share for Internet Explorer went under.

         
  • Posted: 25 May 2010 01:01 PM #10

    jeffi - 25 May 2010 05:26 AM

    Competition:
      Microsoft:
          -Losing over 1 billion per quarter in an attempt compete in search. MSFT does not have the scale to generate the quality search results that Google?s size enables. A critical disadvantage.
          -MSFT?s major revenue streams are threatened by Google?s free strategy (Smartphone, Desktop and Tablet OS and Office Suite). They will collapse as a competitor once Google?s free strategy starts eating into their revenues.
      Apple:
          -Apple can continue to generate massive profits and growth by producing the best combination of hardware and software at a premium price as well as leading in innovation. Apple has/ had successfully beaten MSFT, and all other companies in the smartphone space because of the application store. (Ironically, in the same way that Microsoft had previously beat Apple on the desktop). Unfortunately, Apple?s proprietary OS strategy cannot win market share against Android?s free OS without a clear advantage in applications. Unfortunately, Apple?s first mover advantage was not fast enough.

    I believe Microsoft is here to stay. Of the companies mentioned, Microsoft has the highest level of profitability, followed by Apple and Google pulling up the rear. Microsoft is here to stay and will be competing with Google on all fronts. There’s no way forward for Google that doesn’t require a huge investment and whether or not MSFT chooses to lose money on search in the short-term is irrelevant.

    Google has to deliver far more than a free Chrome OS. It needs to deliver margin to hardware OEMs and needs to deliver dollars back to developers to support its platform.

    I see Apple as the company that has commoditized software, not Google. Google needs to deliver sustainable revenue streams and profitability opportunities for partners.

    Of the three companies mentioned, Google is untested in the operating system market. Again, this is not an issue of market share. If market share were a determiner of success Dell, HP Acer and Toshiba would be far more profitable than Apple.  It’s not an issue of market share. It’s an issue of revenue share and Google will not only need to improve hardware margins as justification for adopting its OS, it needs to deliver revenue back to developers creating apps for its mobile handset OS.

    So far I’m not convinced Android will deliver more than headlines while Google figures out how to deliver Chrome.

    I do think GOOG is dramatically oversold. But I don’t think the company’s success in the handheld device market is guaranteed.

         
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    Posted: 25 May 2010 02:54 PM #11

    DawnTreader - 25 May 2010 04:01 PM

    ... Google has to deliver far more than a free Chrome OS. It needs to deliver margin to hardware OEMs and needs to deliver dollars back to developers to support its platform ...

    Good point.

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  • Posted: 25 May 2010 03:19 PM #12

    jeffi - 25 May 2010 11:46 AM

    Google came after Yahoo and won for this reason. Google’s results are better.

    Comparing those two, I see the same simple input pages, very similar results pages (and search results), and similar speed.

    It seems to me that search has already been commoditized…

    Apple and Google seem perfect. Google has more potential and leverage and a bigger moat with less competition

    Whoa—I disagree on every one of those points. I don’t think that the respective corporate histories for the last 5 years as well as the companies’ current statuses support your contentions. Google is very vulnerable in cloud computing, search, and advertising.

    [ Edited: 25 May 2010 03:30 PM by deasys ]      
  • Posted: 25 May 2010 06:07 PM #13

    jeffi - 25 May 2010 05:26 AM

    Google Strategy: My Simplistic View

    1. Best in Search (Algorithms and Scale)
    2. Extend Market Position (old MSFT Strategy)
    3. Commoditize Software to Monetize Search (Free Software)
      -Platforms
          -Smartphones: Android (a demonstrative success)
          -Tablets (likely success due to similarity with Android OS)
          -Desktops/ Laptops: Chrome OS (to be released shortly)
          -TV (late fall introduction, 1st mover advantage?)
          -Application Platform built into all OS
            -games, books, magazines, applications, etc.
            -advertising within all applications
      -Internet Platform
          -YouTube (Video Broadcasting: 2 billion streams per day)
      -Tools (leader in cloud computing)
          -Chrome: Internet Browser (quickly gaining share)
          -Docs (future MS Office killer)
          -Email: Gmail
          -Calendar
          -Photos: Picassa
          -Navigation (already cannibalizing an entire industry)
          -Commerce: Google Checkout (no traction yet)
          -Numerous other Initiatives (Maps, Personal Medical Records, News, etc.)

    I agree on most points. Let me preface my overly simplistic view with the following 2 points:

    Google’s customers are advertisers.
    Google’s users are what Google sells to advertisers.

    The strategy:

    Google’s growth will come from having better insight into its users along with harvesting more users, then selling them to whomever will pay.

    1. Best in Search (Algorithms and Scale)
    2. Extend Market Position (old MSFT Strategy)
    3. Commoditize Software to Monetize Search (Free Software)
      -Platforms
      -Internet Platform
      -Tools (leader in cloud computing)

    #3 I would write as “Commoditize software as data acquisition tools” and describe the strategy as “hand out useful, but free, widgets to people to monitor their behaviour”.

    Advertisers trip over themselves to pay for relevance. Search advertising, where Google is king, works because the ads served result from the user giving them intent - search terms.

    Where Google hasn’t really excelled is display advertising, where Yahoo reigns I believe. AdMob and DoubleClick are Google’s platforms for serving. The algos to determine “what to serve” gets fed data from the commoditized software offerings.

    Let’s say I use the list of tools Jeffi posted:
    -Chrome browser
    -Docs
    -Gmail
    -Calendar

    This gives me data on what I surf, what I document, who I collaborate with, where and when I’m meeting with whom for what.

    -Photos: Picassa
    -Navigation (already cannibalizing an entire industry)

    This gives me data on where I’ve been, who I went with, where I’m going, recency and frequency.

    -Commerce: Google Checkout (no traction yet)

    The killer - purchase history.

    -Numerous other Initiatives (Maps, Personal Medical Records, News, etc.) Google Apps for office, Gmail, Android on my phone

    Ohhhhh Android. Android can provide me with that lucrative missing dimension to eMarketing - location data. Soon we can add GoogleTV viewing preferences to my profile.

    Armed with this much profiling data, the braintrust at Google can apply their efforts toward increasing relevance for display advertising, which benefits everybody in the food chain - developer/content provider/advertiser/consumer/Google.

    I can’t think of a single competitor that can compete on this scale with Google. It’s this sort of insight into the consumer that advertisers crave and pay top dollar for.

    I’m not saying this is exactly how it’s going to play out.. but I can envision this is where all the moving parts of Google fit in.

    Tell me I’m crazy.

    disclosure: my GOOG position amounts to a rounding error of my AAPL position

         
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    Posted: 25 May 2010 07:25 PM #14

    Pete,

    Thank for highlighting those reasons as to why I’m avoiding using Google products.  Just like capablanca and tetrachloride, I’m looking for way to avoid using Google search (a default for Safari) and considering deactivating my facebook account. These two companies don’t respect privacy and sell my personal data as if is theirs, they might as well implant a chip in my head.

    Disclosure:  Not one of those twenty something dude.

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  • Posted: 25 May 2010 09:52 PM #15

    Mercel - 25 May 2010 11:06 AM

    Frankly, I think search can be commoditized.  When was the last time you heard anybody remark about the quality of search?  Have you ever googled something and said “Wow, what a great search result!”  And if you ever did, was it in comparison with Bing?  People don’t generally make A-B comparisons between search engines, so where’s the “stick?”  Google has a toolbar and personal habit going for them, but I don’t think qualitative considerations w/regard to search really explain Google’s popularity.

    If Google’s search is a commodity, why do they have such a commanding position? In Europe, Google’s lead is much larger than in the US. Microsoft’s Explorer browser stills commands the most market share. Why is Microsoft’s search virtually invisible? How do you explain Google’s popularity?

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