Understanding Google

By April 4, 2011 9 Comments

Over the weekend I read Bill Gurley’s post from last week titled The Freight Train That is Android, courtesy of a pointer on AVC.  It is a brilliant post that made sense of Google’s strategy for me in a new way. 

Previously it had seemed to me that Google’s strategy was largely designed to find significant additional revenue lines to compliment and lessen their dependence on search.  You might call this ‘the Microsoft strategy’ as it copies Redmond’s move from being dependent on one great business (Windows) to multiple product lines (Windows, Office, Xbox, enterprise).  The Google parallels are of course search and Adwords as the original business and Android, maps, Chrome, enterprise, and various social products as the diversifications.

Gurley’s point is that there is an additional logic beyond diversification which underpins Google’s strategy – a defensive logic of protecting their search business.  He cites Warren Buffet’s quote on castles and moats to explain the point:

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.

With the exception of enterprise each of the diversifications I list above serve to protect Google’s search business:

  • Android is all about controlling search on smart phones
  • Maps is all about local search (mobile and desktop)
  • Chrome is attractive because controlling the browser means controlling the default options for search

Social is the one area where Google has consistently tried and failed to make inroads and once again that is about search, although in an indirect manner.  Social threatens Google’s position in search in two ways, firstly by providing an alternative method of discovery in the form of items liked or recommended by friends, and secondly because the data created by sharing, liking and commenting can be used in search algorithms to produce better results. Google’s  announcement last week of the +1 button is their latest attempt to protect their search franchise from Facebook.

So far Google’s strategy has yielded a lot of innovation and great products for consumers.  Over time however, if their moats and castles continue to make them stronger the innovation is bound to wane, as it did at Microsoft.  Some would argue that decay has already set in with Google’s core search product.  If innovation does start to wane then the way Google gives away products to protect their position will start to look anti-competitive in the same way as Microsoft’s bundling of Windows Media Player and Internet Explorer with Windows did.

Whatever the medium to long term future prognosis for Google’s rate of innovation right now they are crushing it with Android and maps and looking pretty good with Chrome, and all of these platforms are creating great opportunities for startups, which makes this a tough post to conclude.  I wouldn’t in any way want Google to stop what they are doing today – not least because we all need Apple to have competition in the smartphone world – but when I think about their innovation having a defensive logic I get a foreboding sense of storm clouds building on the horizon.

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