Google (GOOG) dumped me this week (again!) and I am devastated. As I try to pick up the pieces and move on, the wise words of an old friend resonate more than ever: if you pay peanuts you get monkeys. Felix Salmon wrote an interesting article about the demise of Google Reader leading to the end of RSS and the new focus at the company (here), but I think the end of Google Reader is indicative of a more powerful trend. Not only is Google becoming more focused, it is slowly nudging its users to pay for its services. Google once epitomized the free web, but I am now shelling out more and more hard-earned cash to Google on a monthly/yearly basis and some of Google's free stuff is going away. Since Google has great, under-monetized apps (Android, Docs, etc.), the monetization creep may unlock value for shareholders. As a user, I mourn the end of Google Reader, but as a shareholder I say Bravo!
Last July, I wrote an article titled, "Buy Google As P/E Compression May Soon End; 2Q 2012 Earnings Good Enough For Investors." That article focused on the financial performance of Google's core business and the valuation that Google was getting from the market. Google's stock price has rallied recently, and I wonder if there is emerging excitement about parts of Google that are hard to value, which I have always considered "option value." This article discusses some of that option value in the context of the recent product changes that have saddened me so much.
The Evolution of Google as a Platform
Google was the poster child of the free web (free to users, at least). Core products, such as Search and Gmail, have been free utilities and, uniquely, Google built a profitable and growing business around its user base.
The Google of several years ago was about building and acquiring great products. Its hit ratio has been pretty high. Gmail, Search, Maps, Youtube, Android, Docs, Apps and others have had tremendous success. As an internet pioneer, Google had the opportunity to capitalize on a void that needed to be filled.
Today, the challenge for Google is to become the leading platform, not necessarily have the most products or even have the best products.
As Web 1.0 fantasy business plans were laughed off to the history books and Napster-style piracy got smacked down, the internet evolved. Apple's (AAPL) iTunes and App Store were real game changers. The message of the App Store was, we do not need to build everything in-house, but having the best developer ecosystem will hook users into our platform, thereby enhancing its value.
Google has clearly moved to adopt a similar model. Google Play, the Chrome Web Store and Google Apps are all versions of the emerging app store platforms at Google. Google seems to want to merge these platform and the promotion of Sundar Pichai to head Android, Chrome and Apps may indicate the first step toward this integration.
As Google's platform gains momentum it can let go of certain products, like Google Reader. If you take an App Store approach, then it is often better to concentrate your resources on select high-impact apps and outsource the rest to the developer community that has the freedom and incentive to be more creative and build better products. The App Store model (or platform strategy) allows the company to let go with the comforting conviction that the real value is in a robust platform.
Have you noticed how much you pay Google? Leaving aside its e-commerce efforts, Google's core products are starting to cost money. The first thing that I purchased was domain names, which I continue to pay for annually. I was also a paying subscriber of Google Apps, but, luckily, downsized to the free version before the recent pricing change. Now, there is no longer a free version. I am grandfathered in and save $50 per year, but if not for some luck I would be paying Google for Apps too. Finally, I am thinking about dropping Dropbox and buying more storage capacity from Drive. Once upon a time, Google seems to provide all the storage you need for free, but I may start paying Google for storage too.
Free is becoming freemium (storage) and freemium is becoming premium (Google Apps). With very subtle changes, Google is training its users to pay.
In the brave new world where Google has the confidence to charge for its apps, it clearly has an incentive to focus its resources on making a few core apps worthy of a pay-model as opposed to claiming as much territory as possible with under-developed beachhead apps.
This transition could unlock value for shareholders. It seems like only a matter of time until Google finally monetizes Android and Docs.
Back in 2010, a Daily Beast (fka Newsweek) article about Eric Schmidt speculated:
Schmidt envisions a day when there are 1 billion Android phones in the world and notes that if Google could get just $10 from each user per year, it would be a $10 billion business.
Google is already profiting from Android (see Asymco: The Android Income Statement) but there is likely more value to be unlocked.
Docs may likely be the biggest beneficiary of Google's new focus/monetization strategy and it clearly has a big market opportunity. In FY 2012 (ended June 30), the Microsoft's (MSFT) Business Division generated $24 billion of revenue and 90% came from the Microsoft Office system (mainly Office, SharePoint, Exchange, Lync, and Office 365).
I stopped using Microsoft Office for most tasks, but, unfortunately, still need Excel and Powerpoint for a few things. I would gladly pay Google a few dollars a year for an enhanced version of Docs that could finally end my dependence on Office. I recognize that Microsoft will likely have a lock on the high-end business market for a long time to come, but Google may be able to eat away at the low and mid-tiers. It is hard to quantify how much value could be unlocked at Docs, but it could be substantial.
If Google Can Charge, So Can You (and your start-up)
Paid apps, paywalls, subscription services and tip jars are popping up all over the digital landscape and Google's monetization creep could further nudge us away from the expectation of a free web.
In addition to the benefiting Google, this is a great development for entrepreneurs and VCs. Entrepreneurs in the consumer internet space do not need to only rely on ad-supported business models. Consumers are paying, so now there is more incentive to build great products. Apple launched the app economy a few years ago, but we are still in an early inning of that game. Evernote's recent $1 billion valuation is a great example of this potential (by the way, Evernote is probably the kind of product Google shoulda, woulda, coulda built ontop of Docs, if it had been more focused).
This trend is also an important tailwind for newspapers and the journalism community. If you are generating premium journalism (even for a small niche audience), readers may become more willing to migrate to a subscription.
The Implications for the Mini-Googles
Google spawned three mini-Googles headed by ex-Googlers: Sheryl Sandberg at Facebook (FB), Tim Armstrong at AOL (AOL), and Marissa Mayer at Yahoo (YHOO). Facebook, AOL and Yahoo all have the same opportunities and challenges: lots of second-tier content, some premium content and evolving advertising technology.
It seems that Google is still far ahead of Facebook, AOL and Yahoo in terms of the quality of its content (especially Search and YouTube) and the sophistication and profitability of its advertising technology.
The three mini-Googles are playing catch up to the Google of yesteryear. For example, Facebook's recently announced changes to Newsfeed seemed anti-climactic. So, Facebook is going to move some things around so it can put more advertisements for online games and credit cards in between pictures of my nieces and the children of my high school buddies.
Google's potential focus on building out great apps (and possible monetization) seems a lot more exciting. It will be interesting to see if Facebook, AOL and Yahoo continue down the road of content / ad tech, or move in a different direction.
(By the way, I think that smaller content companies that are more oriented around premium content for selects audience are more interesting. There are examples in many verticals, including real estate, finance and health.)
Google's recent product and personnel decisions seem to be about a lot more than just focus. As a user, I am already feeling Google's monetization creep and this trend is likely to continue. Investors, analysts and the financial media are obsessed with Apple unlocking value through its capital structure, but Google may unlock value through increasing monetization. This could be a positive development for the broader digital ecosystem and, especially, for Google's shareholders.
Please note that I have no information about the actual plans of Google or any of the companies mentioned in this article. I do not speak to the executives of these companies and these thoughts are purely my own observations. They may be accurate or not and any of the trends mentioned above could take a very long time to materialize, if at all, so please do your own homework. If you disagree with me, please feel free to comment below.
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