Interesting and thoughtful post from Bill Gurley. Even more enlightening comments, just showing how smart people are in the industry we live in.
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. . . . So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free).
A simple value chain or five forces analysis will help someone come to the same conclusion. That competitors is not just someone selling the same product as I am. Instead, the security of my strategic position in the industry is dependent on my suppliers as well as my distribution channel. No one wants to have Walmart being the one and only distribution channel, and in Google’s case, Google doesn’t want to rely on iOS or Blackberry to be its main method of reaching the mobile user. Forward integrating to the OS layer, taking out a potential source of dis-intermediation or competition is a good & common strategy. If nothing else, it gives Google better negotiation leverage with Apple.
The problem worth exploring though, is at what point, does Google’s position in search puts them in the classification as a “monopolist” and when that happens – using profits from one industry to subsidize the lack of profits in another for marketshare is very much considered illegal. (”if it hurts the consumers” being the pivotal legal distinction). We’ve seen Microsoft do this in the browser space. Google has one-upped the “micrsoft way” by doing the same playbook in browsers (chrome), OS (android), application (docs), and more . . . Microsoft was once the great destroyer of industries – instantaneously gaining huge market shares while eliminating competitor business models and thus imploding addressable marketing opportunities.
Google’s vigor, persistence, and focus is refreshing and unseen since Bill Gates was at the helms of MSFT dismantling the desktop productivity application industry. Welcome the new juggernaut, nothing lasts forever, this only makes the game more interesting.
(and yes, its refreshing, I dont think its up to Google to self-censor, but it is up to our legal systems to determine limits and freedom of allowable actions)