Google’s recent $3.2 billion acquisition of smart thermostat maker Nest was a fascinating move. The only comparable Google acquisitions by size are DoubleClick, YouTube and Motorola. All directly related to Google’s core online advertising business. But home appliance maker Nest is not about online advertising. Not directly anyway. And late breaking, Google has also acquired AI company DeepMind for $400 million. As a result of these acquisitions, a lot of first rate analysts have written about Google. Rather than compete with my favorite experts, I’ll comment. Though in the last section take a longer view on where Google might be headed.
Horace Dediu writes spot on about Google’s culture.
There is no representation of themselves as a “business seeking profit” or even as a commercial entity. It’s not simply because their business model is embarrassing. It’s because all business models are embarrassing. The representation is one of a research laboratory succeeding against difficult problems. Very similar to a successful academic or industrial laboratory sustained by grants from a benevolent (but messy) organization. Google becomes the embodiment of “big science” and “the world’s laboratory” unfettered by politics and unsoiled by commercial interests.
Ben Thompson tweeted a similar point “start with the premise that Google’s ultimate goal is not making money.” Ah! You remain skeptical. But don’t fall into a common trap. Just because you don’t like how a business operates, don’t jump to the conclusion their stated motives are a lie. It’s satisfying. But 9 times out of 10 unnecessary. Apple says their primary goal is to make the best products they can. Non-fanboys are tempted to believe that’s a clever marketing lie used to extract excess profits from fools. Amazon says they want to deliver amazing customer service. Haters believe they destroy neighborhood retailers out of pure bloodlust. Google’s says they want to create a legacy greater than Bell Labs and Xerox PARC combined. We should take this motivational claim at face value. Regardless of whether we like the results. Google wants to have the smartest people alive transform the world using machine learning and the internet. Money will follow. Somehow.
Android’s real role is as the smart platform for commodity connected electronics. Over 80% (conservatively as it is likely higher) of Android’s market share is made up of mid-low range cost smartphones, tablets, and a host of other electronics. What is growing, however, is Android’s presence on appliances and other non-computing devices. In essence Android is shaping up to be more like a bios, or a debugged (often poorly debugged) platform.
Nest of course is an example (not yet running Android). But this also includes devices like smart door locks which can be unlocked remotely using your phone. Benedict Evans compares Android to the internal combustion engine. A general purpose engine used to power 10’s of billions of devices during the internet of things era.
Ben Thompson argues Google bought Nest to diversify out of what will soon be a lower growth online advertising business.
In short, if you consider the three business models that are capable of being the foundation of multibillion-dollar businesses – consumer devices, ad-supported consumer services, and business software-as-a-service – Google had just about maximized their potential in the ad-supported consumer services model. Enter Nest. In my estimation, this deal is not about getting more data to support Google’s advertising model; rather, this is Google’s first true attempt to diversify its business, in this case into consumer devices.
Michael Mace correctly points out this diversification means Google is becoming a conglomerate.
The idea behind the “Internet of Things” is that network connectivity is moving into almost everything. If that’s Google’s investment thesis, it could rationalize an investment in almost any industry. Appliances? Absolutely. Shipping and logistics? You bet. Phosphate mining? OK, maybe not that. But any category of products that have electronics in them is fair game, as are any services that rely on data management. That’s going to be most of the economy.
If that’s the case, we’ll need to evaluate Google’s strengths and weaknesses differently. We should worry less about the overall grand plan, and more about the management structure of its businesses, the skills of its general managers, and the efficiency of the support staff behind them. In other words, will Google be more like GE or like HP?
Reflect on where we’re headed. Google already has a lock on internet search and online advertising. They own Android, which is not just the most common operating system for phones/tablets, but also becoming the defacto monopoly operating system for connected devices. Nest shows they plan to move into that market aggressively. Meanwhile people are rightly suspicious of US internet companies due to recent revelations of NSA spying.
Robin Hanson is an economist, not a tech analyst. Perhaps his outside perspective on “operating systems, search engines, social networks, and IM systems” will help.
[T]hese systems have large network effects and economies of scale and scope. Yet they are now almost entirely unregulated. Why? Some obvious explanations, fitting with previous patterns of regulation, are that these techs are high status, new, and changing fast. But these explanations suggest that low regulation is temporary. As they age, these systems will change less, eroding their high status derived from being fashionable. They will become stable utilities that we all use, like the many other stable utilities we use without much thought. And that we regulate, often heavily.
Google as regulated utility. Not something coming next quarter, but long term nearly impossible to avoid. Of course the telephone utility AT&T supported Bell Labs as part of the regulatory agreement surrounding their legal monopoly. As Horace Dediu pointed out, what’s so odd is Google has this flip-flopped. It’s as if Bell Labs ran a utility at their pleasure. As in academia, this approach risks creating a culture where people are incentived to be good at applying for grant money, rather than deliver results. Making overspending on blue sky projects and acquisitions a chronic issue. But this lab is not just running a utility, it’s now running a GE-style conglomerate. Call it General Internet. One where all project funding decisions are made at the sole discretion of very top leadership. But Google’s future direction is more unpredictable than even this implies. Since their goal is discovering what we don’t know yet, it’s impossible even in principle for Google to have long term plans. The leadership can only decide what to do next after seeing the latest lab results.
How will this culture react to government regulation? Best case they handle it gracefully. So the regulations could be light. Little impact to profits or how the company operates. Worst case is not so good. They get petulant about lowly government workers telling them how to run the world’s most important lab. And human nature takes over. Regulators question not just what Google does, but their motives for doing it. Antitrust lawsuits follow. Accusations of NSA spying and unlawful use of personal data are next, fueled by a populist backlash against self-indulgent whining from the kings of silicon valley. A domino effect tied to misuse of personal data ripples through other global internet companies, turning them all into tightly regulated utilities. In turn these monopoly utilities become entwined via regulatory capture with local politicians. This balkanizes the internet along national/regional lines, and the internet becomes a playground for industrial policy. China embraces this trend. Europe follows. Ostensibly to protect privacy, but in reality to legislate European players back in the game. Like I said, worst case is not so good. Of course it’s unlikely to go that far. But in one form another, regulatory rules for internet utility companies are coming.
Let’s end speculatively with new tech to regulate. Last year I argued voice interaction will become the “God particle” of mobile. Who do we think is closest to unleashing this “God particle”?