Google's new business model

http://stratechery.com/2014/googles-new-business-model/

by ben336 • 13 years ago

139 57 13 years ago

chippy• 13 years ago

Hmm, I didn't quite get what the new business model was from the article. I got it that they were diversifying and I can understand it as an investment for the future but that doesn't explain what the new model is. Could someone help?

monkbent• 13 years ago

See the previous article: http://stratechery.com/2014/business-models-2014/

cromwellian2• 13 years ago

Selling you stuff directly. You pay, instead of advertiser pays. Namely, you pay $$$, and fancy electronic consumer device arrives at your doorstep. B2C consumer electronics.

evv• 13 years ago

Google clearly has an unprecedented (well, maybe except for sun..) set of technologies on the horizon. Between network infastructure, mapping, energy, robots, and now home automation, their dominance in the future is easy to forsee.

However, there was no mention about Google's rise to power being centered around a focused set of high-quality web services. And now they are starting their "3rd business model leg" of consumer devices before they have truly mastered their second, the SaaS market. I find it funny how the OP quickly glances over Apples unprecedented focus, althewhile highlighting and admiring Google's unwarranted diversification.

The obvious question is: can Google get away with it all, or will they fail without focus? They have managed to stay cohesive so far, but as the author rightly points out, Google's true diversification has only just begun.

Silhouette2• 13 years ago

The obvious question is: can Google get away with it all, or will they fail without focus?

It will be interesting to see how Google handles quality and customer service if it increases its efforts to sell consumer devices.

You can get away with a lot of ignoring people unhappy about the quality of your service if you're giving away that service for free in return for showing them advertising. Their only option is to stop using your service and go somewhere else, which doesn't cost you much if they're still a small proportion of your user base.

However, you can't get away with a lot of ignoring unhappy people if you sell them expensive consumer gadgets that don't work properly. They'll do things like returning the item (substantial overheads for you even if it's in resaleable condition) or charging back the purchase fee if you don't make a return reasonably easy (more immediate overheads, and if you develop a pattern of this happening it's going to hurt your long-term overheads with the card companies as well).

I'm a little surprised Google aren't going for the huge-value business model that the linked blog overlooks: being the on-line distributor/middle man. This position typically rakes in much of the profit while taking on relatively little risk and doing relatively little work to create the underlying value, and it always has; see: record labels, book publishers, app stores, cloud hosting, and of course the granddaddy of them all in the Internet age, Amazon.

cpeterso2• 13 years ago

I'm a little surprised Google aren't going for the huge-value business model that the linked blog overlooks: being the on-line distributor/middle man. This position typically rakes in much of the profit while taking on relatively little risk and doing relatively little work to create the underlying value

Google has the platform to implement something like Gumroad, but Google hasn't had much luck with consumer services like Checkout.

krakensden• 13 years ago

However, you can't get away with a lot of ignoring unhappy people if you sell them expensive consumer gadgets that don't work properly. They'll do things like returning the item (substantial overheads for you even if it's in resaleable condition) or charging back the purchase fee if you don't make a return reasonably easy (more immediate overheads, and if you develop a pattern of this happening it's going to hurt your long-term overheads with the card companies as well).

People keep saying that, but is it really true? People buy lots of things from companies famous for terrible customer service all the time. I understand wanting it to be true, for sure...

dclara3• 13 years ago

Agree. Google is not a hardware company. Other than data collection, do they know how to build hardware systems? I don't mean the technical details which they can buy from acquiring engineers. What kind of new vision do they have in the home automation industry?

psbp2• 13 years ago

I'd imagine that it's very close to Nest's vision now.

spinchange• 13 years ago

I am reminded of so many great and formerly dominant tech giants that have pursued a similar course of deep investment, acquisition, and R&D in newer and more cutting edge technologies outside of, or tangential to their main engines of revenue and dominance without ever fully moving beyond those engines.

Thinking specifically of companies like Intel, Microsoft, Cisco, et al.

All spent (and continue to spend) literal billions on acquisitions and R&D and yet all still pretty much make their money from their original core competence.

I think Google's case is simply more ambitious. Android is probably their second biggest adoption success after search/web apps but it seems evident they're not satisfied with the financial ROI of it... It's a defensive thing.

tl;dr: Pivoting is very hard and history is full of brilliant companies that have tried and never been fully able to.

spacemanmatt• 13 years ago

This article shed credibility in the 1st paragraph, calling the Motorola purchase a patent and panic-driven deal. Au contraire, it was a heck of good deal for Google. It's not clear that Google panics about anything.

Forbes put it like this: http://www.forbes.com/sites/timworstall/2013/10/22/motorola-...

cromwellian2• 13 years ago

Much like the "panic" supposedly over Facebook at Google. Unless it isn't clear by now after Facebook's IPO, the apocalypse of social search/ads eating Google's lunch didn't materialize, and if Google has anything to worry about, it's not Facebook, but mobile's screen size and drive towards native apps hurting the web driver ad business.

Steko• 13 years ago

This tax "analysis" doesn't even pass the smell test and appears to be based on the assumption that Motorola losses will continue at the Q3 '12 record level and makes hay of the $700 of reduced taxes Google would have to pay in that case while ignoring the actual $2 bln losses a year that would pile up on the side.

ZeroGravitas3• 13 years ago

The tax analysis is based on past losses not future losses, that's why the tax expert says they'll get them up until 2019, rather than indefinitely.

pinaceae• 13 years ago

The Motorola deal happened due to the loss of the Nortel patents to the Rockstar consortium. Defensive patent move by Google.

psbp2• 13 years ago

Maybe I'm imagining, but weren't there rumors that Google's new business was taking small fees from online and real world purchases? Especially those expedited through Google hardware and software?

It certainly would make Google Shopping, Glass, and self-driving cars seem like legitimate business decisions.

notatoad• 13 years ago

That is why I ... am inclined to give them the benefit of the doubt with regards to Nest data.

What is with the paranoia over Nest's data? Yes, google is a data-hungry company. but Nest doesn't collect any valuable data that google doesn't already have. Sure, the motion sensors in a nest thermostat can sense when somebody is in your house, and what the temperature is. But Google already has your cell phone, they know where you are at all times, that's a hell of a lot more valuable than knowing whether somebody is currently inside whatever building where you installed your thermostat in.

I suspect that the nest acquisition is about finding new uses for all the data they have, not about collecting more data. Google already knows, without installing sensors in my house, when i leave for work. they know when i'm heading home, and when i go on holidays. That all seems like information that a home automation system would love to have access to.

toddmorey2• 13 years ago

The paranoia fascinates me as well--I feel it, too. I was surprised by my own disappointment in the Nest acquisition. I think there was a time earlier when I would have been tremendously excited.

There seems to be a tipping point for a company when people move slowly from cheering for you to against you. I think it's both a combination of size and behavior. I do fell that Google's push with G+ has harmed their brand in some respects. It was one of the first times personally that I felt that my wants and needs were no longer aligned with theirs. Then the Gmail changes, less room for organic search, etc. I am not saying no one is rooting for Google. I am saying their brand is in a new, unfamiliar area of public opinion and there's something more behind it than their ravenous ambition.

FigBug• 13 years ago

I find it fascinating to watch how companies reputations and image changes. Apple was considered 'beleaguered' for a long time after they were making tons of money. They are still considered to be 'about to fail' by many. Lots of people used to be pro Microsoft, then they were the evil empire, now they are in the process of trying to change their image. Google could do no wrong for a long time, now everything they do is wrong.

It'll be interesting to watch how Google handles this in the coming years.

toddmorey2• 13 years ago

Oh and on the Nest acquisition itself: I think the author is right. As the number of people joining the internet reaches saturation, it's no longer a high-growth category. But the number of devices—things—is limitless. I think this is a small mark in history as companies will turn their focus towards the internet of things.

Watches, Glass, tablets: all of these are only secondary displays. Nest, it strikes me, is one of the first successful pure-play "internet of things" companies. I think that's why they commanded their price tag.

wsinks• 13 years ago

I'm thinking of Nest as "Home Cloud Compute". That little thermostat desperately wants to be the hub of everything we do - after all, energy is what we use in the home for anything we do, and heating and cooling is the majority of that energy usage.

meandyounowhere• 13 years ago

Disagree a bit. Even though google knows where am I or my cell phone data I have choice to turn off GPS, can turn off cell phone. Can you afford to turn off thermostat ? Also, as of now they don't collect data. What is guarantee that they won't do in future ? All they say is we have changed our terms and conditions and don't even ask or care about whether we accept or not. Having motion sensor that sense your presence and having that data on someone's server is always scary. Right now Google is king, but will it always be, given the race to top in SV ? So why won't they make further efforts to collect more data ? Not that I am naysayer but I didn't like the news when I read it yesterday.

kllrnohj2• 13 years ago

All they say is we have changed our terms and conditions and don't even ask or care about whether we accept or not.

Well, in that scenario you can always change to a different thermostat...

Having motion sensor that sense your presence and having that data on someone's server is always scary.

Is Google more scary than Nest? You signed up for that data to live on someone's server when you bought a Nest, the only difference now is that it's Google's servers instead of a small startup's.

jimktrains2• 13 years ago

Possible reasons for paranoia are having multiple avenues to gather similar data? If one avenue is rendered useless (laws, tech, &c), the other avenue will still gather data.

Just a thought.

loceng• 13 years ago

People don't realize that the power company also knows a lot about your activities - how many lights you have on, computers, fridge, doing laundry or using dishwasher? Etc.. They can have a pretty good layout of your daily activities at home.

ds92• 13 years ago

The old-style meters didn't give the power company this data; they were read only monthly, not continually. The newer wireless ones do give full-time total watt-hour data.

However, the sole justifications for any of that is billing and planning of capacity. It is not necessary to those ends to have individual applicances report to any outside party (as the "smart home" fans keep enthusing about), and people can opt out of things like Nest thermostats and "smart" TVs.

ZeroGravitas3• 13 years ago

The reason for the negative reactions is that Nest was marketed strongly to Apple fans (e.g. originally sold exclusively via the Apple store), targets a particularly geeky section of that audience and it was bought by their biggest rival.

It's similar to the reaction when a promising young athlete switches to the big rival sportsteam, and the responses are similarly emotional rather than logical.

tzs• 13 years ago

My temperature settings change depending on if I'm sleeping well, and my overall health level, and if I've been worrying about my financial future. If someone could see how I tweak my house temperature, they would actually be getting some small amount of sensitive information on those private matters.

Is it enough to do anything with? In isolation, certainly not. Combined with everything else they can get on me? Probably still safe, but not so certainly safe that it isn't worth thinking about some.

xerophtye• 13 years ago

I believe the author's analysis is relatively more sane than the general paranoia. Yes, google has tons of data on you but its primary use of that data is to try to get you to click ads. That's how they make money off of your data. But as the author states, that business grows with increase in internet penetration. Once the number of internet users stops growing significantly, this business model stops growing too. So it is not in Google's best interests to gather more data. What will Google do with it?[1] So it makes sense that the moves they make now are about diversifying their business. So now that they have this much data, they will probably create consumer goods that make good use of this data

[1] http://xkcd.com/792/

ds92• 13 years ago

"What is with the paranoia over Nest's data? ... Nest doesn't collect any valuable data that google doesn't already have ... Google already has your cell phone, they know where you are at all times"

In the first place, only a small minority seem to be seriously concerned about privacy at all.

However, there is no basis for assuming that that minority are giving Google their web or cell data. To the contrary, precisely the person who is prefers not to give Google his home data, is less likely to be already giving them his/her web, cell or other data.

cracell• 13 years ago

Completely ignores Google's aggressive acquisition of robotics' companies. I'm not sure how those two fit together but unless this is two branches of Google moving in different directions I think they must both fit into the same vision.

dclara3• 13 years ago

Interesting comment. Can you please elaborate or offer some reference about Google's vision on these two hardware effort or any of these two?

jmillikin• 13 years ago

This submission links to the blog's top level. The article's permalink is http://stratechery.com/2014/googles-new-business-model/

snowwrestler2• 13 years ago

Oh, this is the proof of the new business model? Not the Motorola purchase, which was far more money for a far bigger consumer device company?

hrkristian• 13 years ago

As the author explains, and I agree, Motorola gave Google a large amount of patents and a way to enter the phone market. The latter lets Google have more influence in how that market expands, in order to tie it even more with their existing services.

Nest doesn't offer either of these, I see the potential to tie in with Google devices and services, but not the other way around; drastically different to acquiring a phone company. We'll definitely see Google Now cards saying "Heaters turned on at Home, expecting your arrival", I very much doubt we'll be seeing articles about thermostats posting feed updates to G+.

...or will we?

snowwrestler2• 13 years ago

Sure, everyone thought the point of Android was to protect Google's ad business on mobile, and therefore they needed Motorola's patents for defense.

But what Ben is proposing here is that Google is actually adding a separate, additional business model that generates profits directly from product margins. If that is his thesis, then it's practicially intellectually negligent to rest on the conventional wisdom about the Motorola purchase.

Only one of these can be true:

1) Google is adding a products business model - If this is true, then everything we thought about the Motorola deal needs to be re-examined. It wasn't just about patents.

2) Google is not adding a products business model - If this is true, then the conventional wisdom is right about Motorola, but Ben is wrong in this article.

wturner2• 13 years ago

From what I've read they've also entered the defense industry through Boston Dynamics and are now (I guess) "officially" in the business of war.

Thirdegree• 13 years ago

You've read incorrectly then. Google had said they will honor Boston Dynamics current contracts, but will not take new ones.

wturner2• 13 years ago

Well, I stand corrected then.

uptown2• 13 years ago

This post reminds me a lot of Benedict Evans' post from October.

http://ben-evans.com/benedictevans/2013/10/27/simplicity

ZeroGravitas3• 13 years ago

Two of the references given seem incredibly sloppy:

1. "a surprisingly large amount of Google’s ad revenue is driven by just a few adwords." links to an inept infographic pie chart organized by volume (so "keywords" that earn more money can have smaller slices) and the "keywords" are actually "keyword categories", The authors of the infographic do make the claim he repeats, they just don't seem to present any evidence to support it, since they snip the long tail of the data and are more interested in selling software to those who want to make money on the high CPC terms.

2. suggesting that Google's revenue and profit will peak when the growth rate of internet adoption peaks seems odd enough that without further explanation I'd assume basic innumeracy as the cause. The source suggest internet growth until 2040 which seems a bit more positive for those betting on the internet and/or Google given the article's premise that they're linked.

2.b Also, that growth is a binary use/don't use metric, it takes no account of e.g. someone with a laptop buying a web enabled phone, or simply using either device more.

corresation3• 13 years ago

Analyses such as this suffer from an overly simplistic model that is wholly detached from actual business reality. One where every company collapses down to one single thing they do.

But that has never been the case for Google, or pretty much any company for that matter. This isn't "new", and Google has always been diverse.

Do people remember what Google's original "business model" was (meaning "how can we scramble to pay the bills on the technology we've built")? They sold search appliances for business: You could buy little rack mount units that would build a search corpus of your network and allow in house searching. The search engine was largely just a demonstration that Google knew search.

They grew from there. Over the years they've sold virtual machines, mail accounts, backup storage, computer cycles, smartphones, entertainment units, laptops, smart glasses, and eventually self-driving car technology and robotics. The Nexus line started as developer units, but it grew into a mainstream set of technologies that clearly Google wishes was much more successful and lucrative. Recall the ill-conceived Nexus Q.

Because they're a big, diverse company. They want to make money however they can. While the common sentiment on the Motorola purchase is always the "for patents" line, is it not possible that they wanted to start benefiting more financially from Android, getting directly in the business that Apple was make so much money in? Success or failure is irrelevant, Google's actions have spoken loudly that they want Motorola to succeed as a device maker, benefiting Google in the long run.

There is nothing new here. Company wants to leverage their strengths to make money. In the same way Apple has never been only a smartphone or computer hardware company -- they want to make a little coin on that app you purchase, the software you buy, the movies you watch, the music you listen to, the services you use, and even the ads they feed you. In the real world businesses tend to be like that.

andrenotgiant3• 13 years ago

|Over the years they've sold virtual machines, mail accounts, backup storage, computer cycles, smartphones, entertainment units, laptops, smart glasses, and eventually self-driving car technology and robotics.

All of these account for less than 3% of Google's Revenue, many probably operate at a loss. What this article is saying is that Google is finally putting together a SERIOUS challenger to their Ad revenue business in the form of consumer devices. The diverse products you listed were more about Google swimming in money, being open to new ideas, and having lots of clever and creative people.

corresation3• 13 years ago

What this article is saying is that Google is finally putting together a SERIOUS challenger to their Ad revenue business in the form of consumer devices.

Google is now "serious" because they bought a company with $300 million in annual revenue? If you must talk percentages, that is less than 1/2 of 1% of Google's revenue. It is 1/10th Motorola's revenue last year.

That argument doesn't fly at all. Google bought Nest to continue the same strategy they've been using for many years, which is finding ways to leverage their technology and name[^1]. That Google makes enormous sums from advertising doesn't diminish those attempts, nor does it undermine the intention of the people behind them.

^1 - I've seen quite a few people talk about how "most" people are now concerned about Nest/privacy, etc, where their most is a minuscule sampling of their blogging and twittering peers. Among the mainstream public sentiments are extremely positive regarding Google, and I would wager that the overwhelming majority would see "A Google Company" on the box as a huge positive.

Torn• 13 years ago

OP URL isn't a permalink, for future viewers: http://stratechery.com/2014/googles-new-business-model/

eitally• 13 years ago

In all honesty, Google's apparent predestination as the world's preeminent data corporation has me strongly considering looking for employment with them. So many opportunities, so many potential benefits, and a fantastic way to hedge one's bets against ever being unemployable. Working for Google allows exposure to just about any interesting technology, whether it be robotics/AI/NLP, health/genetics, knowledge mapping & information organization, general web services, infrastructure, hardware design, sensor tech, consumer products, automotive, geographic mapping, mobile devices, media, marketing & communications, social networking, ... the list goes on and on.

Google's new business model

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