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Google Redefines Disruption: The “Less Than Free” Home business Model

Posted on October 29, 2009. Filed underneath: World-wide-web, Venture Capital, Web/Tech | Tags: Android, Business enterprise Model, Disruption, Google, GPS, Net, Mobile, Navigation, TomTom |

I like to consider of myself as an aficionado of company disruption. Right after all, as a venture capitalist it really is imperative to know methods in which a smaller private organization can acquire the upper hand on a sizable incumbent. Probably the most productive ways to do this can be to alter the guidelines with the game in such a way that the incumbent would must abandon or destroy its core business enterprise so as to lay chase for your strategy. This thinking, which was eloquently chronicled in Clay Christiansen’s The Innovator’s Delimma, may be the key premise behind recently successful enterprise movements like SAAS (Software program as a Service), open supply application, as well as the much-discussed Freemium Internet model.  And when each and every of these disruptions are impressive in their very own proper, when I study this week that Google was including free turn-by-turn navigation directions with every and each and every Android mobile OS, I had an immediate feeling that I was witnessing a disruptive play of a magnitude heretofore unseen.

google_maps_logoGoogle has extended had an interest in maps. Early in its background, the organization added “Maps” as one of the coveted tab options supplied in the leading with the screen above its famed search box. At that time, Google did what numerous others did to enter the mapping enterprise - they licensed data from the two duopolists that ruled the mapping home business - Tele Atlas and NavTeq. More than the years, as these two providers gained extra and far more energy, and larger and larger market place capitalizations, Google’s ambitions were growing too. Google wanted to spread its maps across the internet, and to let other people to construct on leading of its mapping API.  The duopolists, recognizing a fox within the henhouse, were apprehensive to let such activity.

Logo NAVTEQIn the summer time of 2007, excitement concerning the criticality of map data (specifically turn-by-turn navigation data) reached a fever pitch.  On July 23, 2007, TomTom, the top portable GPS device maker, agreed to purchase Tele Atlas for US$2.7 billion. Shortly thereafter, on October 1, Nokia agreed to purchase NavTeq for a cool US$8.1 billion. Meanwhile Google was still evolving its strategy and no longer needed to be restricted by the terms of its two contracts. As such, they informed Tele Atlas and NavTeq that they needed to modify their license terms to permit a lot 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 ultimately agreed towards the term modifications, but possibly they ought to have sensed anything bigger at play.

teleatlasRumors abound about just how many vehicles Google has on the roads constructing it personal turn-by-turn mapping data in addition to its special “Google Streetview” database. What ever it can be, it have to be massive. This October 13th, just over 1 year just after dropping NavTeq, the other shoe dropped also. Google disconnected from Tele Atlas and began to present maps that were free and clear of either license. These maps are based on a combination of their very own information together with freely out there data. Two weeks following this, Google announces absolutely free turn-by-turn directions for all Android phones. This couldn’t have been an incredible day for the deal teams that worked on the respective Tele Atlas and NavTeq acquisitions.

To know just how disruptive this is to the GPS information market, it’s essential to initial fully grasp that “turn-by-turn” information was the lynchpin that held the duopoly collectively. Anybody could get map data (there are lots of free of charge sources), but turn-by-turn data was remarkably highly-priced to construct and sustain. Because of this, no one could definitely duplicate it. The duopolists had value leverage and demanded remarkably high royalties, and the GPS device makers (TomTom, Garmin, Nokia) had been forced to be price takers. You may see evidence of this price tag umbrella within the uniquely high $99.99 cost point TomTom now charges for its iPhone application. When TomTom bought Tele Atlas, the die was cast.  Eat or be eaten. If you didn’t control your individual information, how could you compete within the GPS market?  This really is what prompted the Nokia-NavTeq deal.

garmin_stockGoogle’s no cost navigation characteristic announcement dealt a crushing blow for the GPS stocks. Garmin fell 16%. TomTom fell 21%. Visualize trying to retain high royalty rates against this strategic move by Google. Android just isn’t only a phone OS, it’s a CE OS. If Ford or BMW need to construct an in-dash Android GPS, guess what? Google will give it to them for free. As we noted in our take on the totally free home business model, “if a disruptive competitor can present a item or service comparable to yours for ‘free,’ and if they are able to make sufficient money to maintain the lights on, then you most likely possess a trouble.” It would be one particular point if this were simply a mean-spirited play by Google to place an end towards the GPS data duopoly. Nevertheless it just isn’t. You can find multiple facets to this remarkably disruptive move.

Though it can be obvious that this maneuver creates a problem for the multi-billion dollar GPS market place, it also poses real challenges for the top smart phone players - RIM’s Blackberry and Apple’s iPhone. Without having access to their own mapping data, these vendors now face an fascinating dilemma. Do you risk flying naked not having absolutely free navigation or do you suck it up and swallow the above common royalty fee for each and each handset? Neither choice is stellar. This difficulty isn’t almost as daunting as the one now faced by the Windows Mobile and Symbian teams.  As computer software providers, they may be lucky to get a per unit royalty equal to that extracted by the GPS information guys. If they’re now forced to integrate this data merely to keep their product competitive, their gross margin just went negative. Ouch!

This really is not just outstanding defense. Google is apt to think that the geographic taxonomy is actually a excellent 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, setting up interesting and innovative mobile apps, will undoubtedly build on Google’s map API.  It is wealthy, it is actually quick to utilize, and pretty frankly the price tag is appropriate. Inside the future, if you’d like to advertise your local enterprise to people with an interest within your local marketplace, chances have you been will look to Google for that access.

Introducing the “Less Than Free” Company Model

android logoGoogle’s brilliance does not cease there. It is difficult not to have been shocked by the rapid rise in current buzz surrounding the Google Android Smartphone OS. When I asked a mobile market veteran why carriers were so prepared to dance with Google, a business they when feared, he recommended that Google was the “lesser of two evils.” With Blackberry and iPhone grabbing much more and much more subs, the carriers had been losing manage from the consumer UI, which undoubtedly represents power and long term monetization opportunities. With Android, carriers could re-claim their buyer “deck.” Additionally, because Google has made an open source version of Android, carriers think they have an “out” if they component tactics with Google in the long term.

I then asked my friend, “so why would they ever use the Google (non open supply) license version.”  (EDIT: Among the commenters below pointed out that all Android is open supply, along with the Google apps pack, like the GPS, is licensed on top.  Does not change the argument, but desired the correct information included right here.)  Here was the large punch line - since Google will provide you with ad splits on search in case you use that version!  That’s correct; Google will pay you to use their mobile OS. I prefer to call this the “less than free” business enterprise model. This can be a exceptional card to play. Mainly because of its dominance in search, Google has ad rates that blow away the competitors. To compete at an equally “less than free” cost point, Symbian or windows mobile would ought to subsidize. Double ouch!!

lessthanfree“Less than free” might not cease with all the mobile phone. Google’s CEO Eric Schmidt has been quite outspoken about his assistance for the Google Chrome OS. And there’s no cause to think that the “less than free” home business model won’t be employed right here as well. If Sony or HP or Dell builds a netbook depending on Chrome OS, they may generate profits on each search every user initiates. Google, eager to safeguard its search share and marketplace volume, will gladly pay the ad splits. Microsoft, who was currently forced to lower Windows netbook pricing to fend off Linux, will probably be dancing having a business model inversion of epic proportion - from “you pay me” to “I pay you.”  It is truly challenging to build a compensation package for the sales team on these economics.

Naysayers of these assertions will most likely have the same retort - superior is essential. They are going to argue that Google’s turn-by-turn apps are inferior to their nicely honed market place leading items. With regard to Android, Google will lack the user interface or embedded software package expertise necessary and will deliver a subpar product.  Plus, simply because the Android OS will be so splintered, QA testing might be tricky and incompatibility issues will abound. Inside the short run, these difficulties will exist.

Despite these challenges, it could be a harmful strategy for any with the a lot of threatened players in these markets to hang on to this “quality” rationalization for very extended. First, Google’s solutions will get superior more than time. The sheer volume of the Android phones in the market place will give them new data feeds to complement their very own mapping effort. Also, they can produce UGC hooks for users to embellish their very own maps (like in Google Earth), offering themselves additional differentiation.  With regard to Android, version three will likely be improved than version 2 will be better than version 1.  Microsoft knows this game well.

A different possibly much more critical factor is the fact that when a item is fully no cost, consumer expectations are low and customer patience is high. Clients appear to seriously like totally free as a cost point. I suspect they’re going to love “less than free of charge.”