“The Freight Train That Is Android”; more on Google’s moat…

A couple days ago, I posted a blog on Google’s moat. Today, I am posting a blog post written by venture capitalist Bill Gurley. Gurley explains how Android, Chrome and Chrome OS are being used by Google to strengthen its moat. According to Gurley, “They are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.”

Google realizes that a major factor is which search engine you use is what’s available to you in the application you’re using.  If you were to use Firefox and the default search engine was Bing (Firefox comes with Google as its default search engine), there is a reasonable chance you would stay with it. That is why Microsoft has worked hard to make Bing available in different channels.

With Andriod, Chrome and Chrome OS, the endgame is to aggressively frustrate any attempt to put a layer between Google and its users. This would be like Coke aggressively expanding into retail to insure that the its products were available. The conundrum for Google’s rivals is that Google does not expect to profit directly from this effort. It simply wants to keep the Huns at bay from its search castle.

Read on…

Yesterday, after the market closed, Research in Motion, the makers of the Blackberry device, announced that they would be lowering their current quarter earnings due to lower average sales prices. In a separate announcement, the company proffered that their new tablet will support Android apps, yet the CEO also made it clear that he believes the world is overly focused on the criticality of having a large numbers of applications on your platform. They also suggested that the guidance issue is temporary, and relates mainly to a product cycle not a systematic change in the industry.

Despite all that has been written about Android, as well as its unquestionable early success, the world at large still doesn’t fully appreciate the raw power of this juggernaut. I have written about this in the past in Android or iPhone? Wrong Question, and Google Redefines Disruption: The “Less Than Free” Business Model. But even so, the more I see, the more I wonder if I too may have underestimated the unprecedented market disruption that is Android.

One of Warren Buffet’s most famous quotes is that “In business, I look for economic castles protected by unbreachable ‘moats’.” An “economic castle” is a great business, and the “unbreachable moat” is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle. Here is a great post from the 37signals blog a few years back that walks through several different examples of potential moats.

For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetization framework. Because of its clear network effect, and amazing price optimization (though the customer bidding process), this machine is a monster. Also, because of its far-reaching usage both on and off of Google,AdWords has a volume advantage as well. Perhaps the most telling map with regards to the location of the castle can be found in Jonathan Rosenberg’s “Meaning of Open” blog post. In this open manifesto, Jonathan opines over and over again that open systems unquestionably result in the very best solutions for end customers. That is with one exception. “In many cases, most notably our search and ads products, opening up the code would not contribute to these goals and would actually hurt users.” As Rodney Dangerfield said in Caddyshack, “It looks good on you, though.”

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8 thoughts on ““The Freight Train That Is Android”; more on Google’s moat…

  1. andy

    I think to analyze Google, basically you should say… Can they keep their dominant position in adwords? here are a few points.

    1. Sophisticated web users do not click on the sponsored links blindly because they are the first two links. My dad does. As the user base becomes more sophisticated, it may mean less sponsored link clicks. (negative)

    2. Google has an amazing platform for growth, in two ways. one, increased use of their search engine. This is a little murky because people may have less need for search engines over time as their go to website become bookmarked and they use apps more. the second way that they have a growth platform is amazing though. they have amazing pricing power, in that the prices for the sponsored links are set at auction, which means that Google automatically captures more value as their service becomes more valuable to web users. (positive)

    3. as Ive mentioned before, google does alot of ancillary things to keep their dominance in search. (negative)

    4. Google competes in a market hungry for engineering and other talent, so they have to pay up. this dilutes the stock and makes SG&A an ever increasing number. Its obvious that Google’s main assets are its people, and they constantly need to be paid in today’s dollars. You can think of their “people talent” as goodwill that constantly needs to be replenished.

  2. Gemfinder

    I’ve wondered for years why hardware vendors (PC and Mac) do not simply fund a nonprofit consortium to run a good-enough, ad-free, privacy-guaranteed search engine. Google’s basic search engine algorithm is 15 years old and well understood. This basic engine could be offered as the default browser for all vendors in the consortium.

    The goal is not to be as good or as comprehensive as Google — that would be expensive and hopeless. The goal is instead much narrower: starve Google of revenue, by offering the two things Google cannot: pre-installation on every new desktop, and total privacy by default. That is an unanswerable competitive challenge.

    If such an approach took even 15 share points from Google, their share price would no longer sustain employee loyalty, and the virtuous cycle would go into reverse.

    I hope this doesn’t happen, because I like Google services, and use them. But it’s achievable, both technically and strategically. And it would not be eliminated by an open OS like Android.

    1. Greg Speicher Post author

      Gemfinder, your hypothetical has a number of problems. First, Google is much more than a 15-year old algorithm. This algorithm is continually improving and supported by a massive infrastructure of hardware and engineers. There is also no reason why anyone would want to use it the alternate service you mention. Remember Microsoft tried paying people to use Bing and that did not do anything except cost them money.

      Microsoft, with virtually unlimited funds, has not been able to dent Google’s moat. A nonprofit consortium is unlikely to do this.

      Investing is about determining the odds of gain time the payout if you’re correct minus the probability of loss times the downside if your wrong. Obviously your scenario is part of Google’s downside case. I view very little probability that what you suggest will happen and an equally unlikely chance that it would succeed.

      1. Gemfinder

        “The goal is not to be as good or as comprehensive as Google — that would be expensive and hopeless. The goal is instead much narrower: starve Google of revenue, by offering the two things Google cannot: pre-installation on every new desktop, and total privacy by default. That is an unanswerable competitive challenge.”

        Microsoft tried to copy Google: same features, same revenue model, same privacy model. I agree it was expensive and hopeless.

        This is more a thought experiment in shifting the playfield: no ads, no revenue, no cookies, no saved history. These are things at least some people want, but Google cannot easily provide them without backing way from their core revenue model. Exploiting a rival’s inflexibility, as this attempts to do, is the essence of competitive strategy.

        Whether it would work is more a question of user behavior than engineering. Search is a well understood problem. The basic algorithm really is about 15 years old. A narrow, good-enough implementation is cheap to make and even relatively cheap to scale, compared to the resources of the potential funders.

        Most of Google’s formidable engineering resources are not spent not on search, but instead on the ever-expanding host of ancillary services, nearly all of them great products, from email to maps to browsers to operating systems. Almost none are profitable. All the money is in search, which of course is still improving, but is now a solved problem to such a degree that CS students write search engines for class projects.

        None of this is an indictment of Google. They are totally great. Just musing.

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