Filed under: Tech News
Google Redefines Disruption: The “Less Than Free” Business enterprise Model
Posted on October 29, 2009. Filed underneath: Net, Venture Capital, Web/Tech | Tags: Android, Business enterprise Model, Disruption, Google, GPS, World wide web, Mobile, Navigation, TomTom |
I prefer to think of myself as an aficionado of organization disruption. After all, as a venture capitalist it is actually imperative to understand methods in which a smaller private provider can gain the upper hand on a sizable incumbent. One of the most prosperous methods to do this really is to change the guidelines with the game in such a way that the incumbent would really need to abandon or destroy its core organization so that you can lay chase for your strategy. This pondering, which was eloquently chronicled in Clay Christiansen’s The Innovator’s Delimma, may be the key premise behind recently prosperous home business movements like SAAS (Software program as a Service), open source software, and the much-discussed Freemium Online model. And although every of these disruptions are impressive in their very own right, when I study this week that Google was such as absolutely free turn-by-turn navigation directions with each and each and every Android mobile OS, I had an instant feeling that I was witnessing a disruptive play of a magnitude heretofore unseen.
google_maps_logoGoogle has long had an interest in maps. Early in its background, the provider added “Maps” as among the coveted tab options offered in the top with the screen above its famed search box. At that time, Google did what a lot of other people did to enter the mapping company – they licensed information from the two duopolists that ruled the mapping home business – Tele Atlas and NavTeq. Over the years, as these two organizations gained more and much more energy, and larger and larger marketplace capitalizations, Google’s ambitions had been expanding too. Google needed to spread its maps across the web, and to allow other people to construct on leading of its mapping API. The duopolists, recognizing a fox inside the henhouse, had been apprehensive to permit such activity.
Logo NAVTEQIn the summer of 2007, excitement relating to the criticality of map data (particularly turn-by-turn navigation data) reached a fever pitch. On July 23, 2007, TomTom, the leading portable GPS device maker, agreed to buy Tele Atlas for US$2.7 billion. Shortly thereafter, on October 1, Nokia agreed to buy NavTeq for a cool US$8.1 billion. Meanwhile Google was still evolving its strategy and no longer wanted to become limited by the terms of its two contracts. As such, they informed Tele Atlas and NavTeq that they needed to modify their license terms to let more liberty with respect to syndication and proliferation. NavTeq balked, and in September of 2008 Google quietly dropped NavTeq, moving to just one partner for its core mapping data. Tele Atlas eventually agreed towards the term modifications, but possibly they must have sensed some thing larger at play.
teleatlasRumors abound about just how several vehicles Google has on the roads setting up it own turn-by-turn mapping data as well as its special “Google Streetview” database. Whatever it really is, it have to be large. This October 13th, just over a single year right after dropping NavTeq, the other shoe dropped at the same time. Google disconnected from Tele Atlas and started to present maps that had been no cost and clear of either license. These maps are determined by a mixture of their very own information together with freely readily available information. Two weeks soon after this, Google announces no cost turn-by-turn directions for all Android phones. This couldn’t have already been a terrific day for the deal teams that worked on the respective Tele Atlas and NavTeq acquisitions.
To understand just how disruptive this is for the GPS information marketplace, you will need to very first realize that “turn-by-turn” information was the lynchpin that held the duopoly with each other. Anyone could get map information (there are various free of charge sources), but turn-by-turn data was remarkably expensive to build and preserve. As a result, nobody could truly duplicate it. The duopolists had price leverage and demanded remarkably high royalties, plus the GPS device makers (TomTom, Garmin, Nokia) were forced to become value takers. You may see evidence of this cost umbrella inside the uniquely high $99.99 price tag point TomTom now charges for its iPhone application. When TomTom purchased Tele Atlas, the die was cast. Consume or be eaten. In the event you didn’t control your individual data, how could you compete in the GPS market place? This can be what prompted the Nokia-NavTeq deal.
garmin_stockGoogle’s free navigation feature announcement dealt a crushing blow to the GPS stocks. Garmin fell 16%. TomTom fell 21%. Consider attempting to sustain high royalty rates against this strategic move by Google. Android is just not only a telephone OS, it’s a CE OS. If Ford or BMW desire to assemble an in-dash Android GPS, guess what? Google will give it to them at no cost. As we noted in our take on the absolutely free business enterprise model, “if a disruptive competitor can supply a item or service equivalent to yours for ‘free,’ and if they can make adequate money to help keep the lights on, then you most likely possess a difficulty.” It would be one point if this were merely a mean-spirited play by Google to place an end to the GPS information duopoly. Nevertheless it just isn’t. There are actually multiple facets to this remarkably disruptive move.
Even though it’s obvious that this maneuver creates an issue for the multi-billion dollar GPS market, it also poses real challenges for the top smart telephone players – RIM’s Blackberry and Apple’s iPhone. Without having access to their very own mapping information, these vendors now face an exciting dilemma. Do you threat flying naked not having no cost navigation or do you suck it up and swallow the above common royalty fee for every and each handset? Neither solution is stellar. This dilemma isn’t almost as daunting because the 1 now faced by the Windows Mobile and Symbian teams. As software program providers, they’re lucky to obtain a per unit royalty equal to that extracted by the GPS information guys. If they’re now forced to integrate this information simply to keep their item competitive, their gross margin just went unfavorable. Ouch!
This is not just outstanding defense. Google is apt to think that the geographic taxonomy is a wonderful skeleton for a geo-based ad network. If your maps are distributed everywhere on the net and in each mobile device, you control that framework. Money starved startups, building interesting and innovative mobile apps, will undoubtedly develop on Google’s map API. It’s wealthy, it really is uncomplicated to use, and really frankly the value is correct. Inside the long term, if you’d like to advertise your nearby enterprise to people with an interest within your local market, odds are you currently will search to Google for that access.
Introducing the “Less Than Free” Company Model
android logoGoogle’s brilliance doesn’t quit there. It really is very difficult not to have already been shocked by the rapid rise in latest buzz surrounding the Google Android Smartphone OS. When I asked a mobile industry veteran why carriers had been so prepared to dance with Google, a firm they after feared, he recommended that Google was the “lesser of two evils.” With Blackberry and iPhone grabbing a lot more and much more subs, the carriers were losing control with the client UI, which undoubtedly represents power and future monetization opportunities. With Android, carriers could re-claim their buyer “deck.” Additionally, since Google has made an open supply version of Android, carriers believe they have an “out” if they part tactics with Google within the future.
I then asked my buddy, “so why would they ever use the Google (non open supply) license version.” (EDIT: One of the commenters beneath pointed out that all Android is open source, and the Google apps pack, such as the GPS, is licensed on top. Does not change the argument, but needed the right information included here.) Here was the big punch line – because Google will give you ad splits on search should you use that version! That is proper; Google will pay you to make use of their mobile OS. I like to call this the “less than free” business model. This can be a outstanding card to play. Mainly because of its dominance in search, Google has ad rates that blow away the competition. To compete at an equally “less than free” price point, Symbian or windows mobile would must subsidize. Double ouch!!
lessthanfree“Less than free” may not stop with the mobile phone. Google’s CEO Eric Schmidt has been really outspoken about his assistance for the Google Chrome OS. And there isn’t any cause to believe that the “less than free” business enterprise model is not going to be employed right here too. If Sony or HP or Dell builds a netbook according to Chrome OS, they’ll earn money on each and every search every user initiates. Google, eager to guard its search share and market volume, will gladly pay the ad splits. Microsoft, who was currently forced to lower Windows netbook pricing to fend off Linux, is going to be dancing having a home business model inversion of epic proportion – from “you pay me” to “I pay you.” It’s truly tough to construct a compensation package for the sales team on these economics.
Naysayers of these assertions will most likely have the same retort – good quality is essential. They’ll argue that Google’s turn-by-turn apps are inferior to their properly honed market place top solutions. With regard to Android, Google will lack the user interface or embedded computer software expertise crucial and will deliver a subpar item. Plus, for the reason that the Android OS will probably be so splintered, QA testing will likely be tricky and incompatibility difficulties will abound. Within the brief run, these difficulties will exist.
Despite these challenges, it would be a dangerous technique for any from the many threatened players in these markets to hang on to this “quality” rationalization for quite lengthy. 1st, Google’s solutions will get better over time. The sheer volume from the Android phones in the market place will give them new information feeds to complement their own mapping effort. Also, they are able to make UGC hooks for users to embellish their very own maps (like in Google Earth), supplying themselves further differentiation. With regard to Android, version three are going to be much better than version two will be far better than version 1. Microsoft understands this game nicely.
One more possibly even more crucial element is that when a product is entirely free, consumer expectations are low and consumer patience is high. Prospects seem to definitely like free as a price tag point. I suspect they will appreciate “less than no cost.”