Google is the inscrutable company with a penchant for forays into disciplines seemingly unrelated to its primary Internet search business. To cast some light on this inscrutable company, we reduce its business strategy to a simple A, B, C analysis, which explains some of its key moves, including its offerings of the “free lunch.”
We believe that the fundamental equation driving the top line of a search business is directly related to:
A) Eyeballs: How many eyes get to initiate and see the response to a search, basically Google’s addressable market
B) Devices: The means, or gateway for the eyeballs to interact with the Internet search product.
C) Access: The interactive facility by means of which the device reaches the Internet.
In this article we are concerned with Google’s activities in the third aspect, Access to the Internet. However, as background for analysis of Google action in the Access sphere, we first consider how Google progressed through steps A) Eyeballs and B) Devices as it addressed the ascendancy of mobile.
With respect to eyeballs, it became clear to Google that laptop and desktop products were unlikely to ever reach more than a fraction of the potential market and that the world’s eyes were going to be fixed on the small screen of a smart product, i.e. smartphone. For Google this insight meant that for the device to favor its search engine services, a radical breakthrough strategy was needed.
The success of the iPhone was not the solution. Apple’s device, as we have mentioned, is wrapped in its proprietary software. Apple also had products which were cross-elastic to Google’s. In addition Apple was always focused on the high-end market position. And, of course, remember that Apple is always in charge.
Google, we believe, looking at the “eyeball/screen” picture, saw a world of devices, smartphones which were then just beginning to dominate market growth, being run by a set of operating systems, Symbian, iOS, Blackberry Microsoft, Palm and a similar set of browsers, during pre-2008 times.
These OS and browsers were developed by highly competent software teams. Google needed to break through this multitude of OSs by means of a non-technical approach.
The approach, which Google used successfully and will continue to emphasize, is basically the “free lunch” (or to use the famous analogy from Troy “beware of Googles bearing gifts.”)
For the device industry OS licenses have been a continuing nightmare – involving a license expense, usually per device manufactured or sold. This is essentially a fixed cost, paid to the license holder, e.g., Microsoft – for the device manufacturers a margin-destroying, profit-eating cost. At $50 per phone, for example for Windows as of 2013, it was easily 10% or more of the average selling price – more than many firms’ profit margins as a whole.
Therefore it is easy to see, why the world went Android. The technical quality was there at apparently zero license fees.
The OS, to Google is not a product but part of a go to market strategy. They must get the user to their search.
The logic of this decision is magnified by the growth of tablets and potential for other mobile devices, e.g., wearables. The compulsion for manufacturers to cooperate is obvious when one realizes that Samsung and Apple probably have over 100% of the profits in the smartphone category. The others, facing losses, must cut costs and are totally susceptible to Google’s free lunch offer.
The end result of this strategy:
We no longer consider Palm OS, or Symbian or Blackberry as players and even Windows is in the low single digits as a percentage of smartphones worldwide in current sales.
The price to be paid by the device makers for the Android “free lunch” was in the terms and conditions. These devices wake up for the consumer with Google search installed and also as the default, Google Maps for LBS and Docs and Google+. (In addition, if the user does elect another search engine, it will probably not work as well on the Android device as Google does.) The end result is that Google’s market share is even greater than ever with a far, far larger base of users. Hence the basic equation for the top line, capture the eyes and the device, has been met and appears to be in place for several years to come. The only challenge is iOS and in that case Google has some of the best Apps, even though Safari will pick Microsoft Bing as the default.
Microsoft’s recent announcement of reducing their Windows 8.1 charge by 70% indicates that they still have not learned. In order to compete the price must be zero. Otherwise they effectively have no share!
When we move to the third part of the demand generating equation of Google, step C) Access, this no charge strategy is being applied by Google in an area that may seem arcane at first, but is really quite important: data compression.
Over three years ago, Google began looking at Access to the Internet in terms of not just availability, but also performance.
Performance refers not only to speed and latency but also coverage or ubiquitousness, and the recognition that broadband access costs the end user and therefore affects demand.
This led Google to the area of data compression. We note that while iOS commands higher Internet broadband usage than other devices, Apple nonetheless tends to prefer “native” transmissions for quality reason.
In general all attempts at data compression will mean that some things are not only reduced or put into a shorthand, but also some things are dropped or eliminated.
However, it is well known that data compression can significantly improve the perceived performance of a channel by orders of magnitude.
In the area of video encoding, Google has been working on a strategy, which appears to us to be a further example of the “free lunch” strategy that it used in the device area, with Android.
The standard in widespread use worldwide and in North America, H.264, was developed by expert groups for transmitting broadcast high quality television to the mass audience.
This standard is being superseded by a new one, H.265, which essentially doubles the effective transmission rate of current channels. In other words H.265 will permit current HD broadcast facilities to send 4K transmissions.
However, over the last several years Google has been actively promoting an alternative to H.265 known as VP9.
VP9 was developed by Google and is really a proprietary standard, which Google has offered to the standard bodies, enlisting the help of Mozilla, Opera, and a number of chip manufacturers.
While technical tests indicate VP9 will be a big improvement over H.264, it is not quite as good as H.265. But there is the issue that both H.264 and H.265 have license fees – which was referred to at the Streaming Forum in London as “the elephant in the room,” restraining H.265 adoption.
So consistent with the Google strategy, VP9 is being offered for free.
In addition, Google is converting all of YouTube to be available in the VP9 coding format. VP9 has received support recently from a slew of hardware companies, including ARM, Broadcom, Intel, LG, Marvell, MediaTek, Nvidia, Panasonic, Philips, Qualcomm, RealTek, Samsung, Sigma, Sharp, Sony and Toshiba.
How does Google gain in all of this? It appears that most of the Internet VP9 traffic is routed through Google VP 9 codecs in their servers, at their data centers. (All compression techniques have coder and decoders, hence always have an implementation issue, of having to have a coding or decoding capability at each end of the channel.)
Google is helping the application by solving one end of the problem – another gift. Of course, via this free lunch Google is garnering user data directly which will improve its demand model and help refine its strategy to increase the value of its search engine and related services.
The potential impact to the Access part of the Google equation is clearly illustrated in the most recent Cisco VNI forecast of mobile data growth, – 59% of the world’s mobile devices are forecast to still be on 3G through 2018.
The reality is that a large swath of the globe will only have 3G available for years to come as their principal means of Internet access.
3G, as we have all experienced, can be expected to provide 300-to-500 kbs in performance. This severely limits video and multimedia experiences, even YouTube. This amount of bandwidth is at the low end for a Skype video call and will result in freezing or disconnection.
If we now add VP9, all of a sudden a world of applications and media viewing is open to the user, for now we are dealing with 600 kbs to 1 mbps speeds.
There is at least one more enigma to be dealt with in Google’s approach to what we have labeled as category C), Access. That is Google Fiber – not really a “free lunch” – which we will deal with in a future article.
* Photo by OpenClipart.org