Android May Be The Greatest Legal Destruction Of Wealth In History

Bill Gurley thinks that Android is an unstoppable freight train that will prevail against all its rivals. For Google, Android is not even a product with a business plan. It's just a weapon at the service of their master domination strategy, a way to destroy any potential threats that may eventually kill their search monster. This is how they are doing it and the potential consequences.

"People get ready, there's a train a comin'"

—The Impressions

From Zacks via Yahoo: Mark Vickery, On Thursday March 24, 2011, 4:58 pm EDT "BlackBerry maker Research In Motion (NasdaqGS: RIMM – News) beat its fiscal 4Q EPS estimates by 2 cents per share, but missed slightly on quarterly revenues and offered guidance well below the current consensus. This has sent RIMM shares down nearly 10% in after-market trading…"

Yesterday, after the market closed, Research in Motion, the makers of the Blackberry device, announced that they would be lowering their current quarter earnings due to lower average sales prices. In a separate announcement, the company proffered that their new tablet will support Android apps, yet the CEO also made it clear that he believes the world is overly focused on the criticality of having a large numbers of applications on your platform. They also suggested that the guidance issue is temporary, and relates mainly to a product cycle not a systematic change in the industry.

Despite all that has been written about Android, as well as its unquestionable early success, the world at large still doesn't fully appreciate the raw power of this juggernaut. I have written about this in the past in Android or iPhone? Wrong Question, and Google Redefines Disruption: The "Less Than Free" Business Model. But even so, the more I see, the more I wonder if I too may have underestimated the unprecedented market disruption that is Android.

Google's unbreachable castle

One of Warren Buffet's most famous quotes is that "In business, I look for economic castles protected by unbreachable ‘moats'." An "economic castle" is a great business, and the "unbreachable moat" is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle. Here is a great post from the 37signals blog a few years back that walks through several different examples of potential moats.

For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetisation framework. Because of its clear network effect, and amazing price optimisation (though the customer bidding process), this machine is a monster. Also, because of its far-reaching usage both on and off of Google, AdWords has a volume advantage as well. Perhaps the most telling map with regards to the location of the castle can be found in Jonathan Rosenberg's "Meaning of Open" blog post. In this open manifesto, Jonathan opines over and over again that open systems unquestionably result in the very best solutions for end customers. That is with one exception. "In many cases, most notably our search and ads products, opening up the code would not contribute to these goals and would actually hurt users." As Rodney Dangerfield said in Caddyshack, "It looks good on you, though."

AdWords is a highly respectable castle, and Google would clearly want to put a "unbreachable moat" around it. Warren himself is on record suggesting that Google's moat is pretty good already. But where could you extend the moat? What are the potential threats to Google's castle? Basically, any product that stands between the user and Google and has the potential to distract the choice of search destination is a threat. A great example is Firefox. Like many browsers, Firefox has a search bar built into the upper right corner. This leads to a substantial number of Google searches for which Google pays Firefox a handsome fee. From time to time, this fee must be negotiated, and as a result there are constant rumours that Firefox might chose another search engine, like Bing. Other examples include smart-phones and choices made by carriers and/or handset makers. As an example, a few years back, Verizon set the default search box on Blackberry's to Bing instead of Google. Despite Warren's faith in Google's moat, there are ways to move the needle on search share, or at least hurt the economics by demanding more profit share for distribution.

Nobody can't win against Android business model

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not "products" in the classic business sense. They have no plan to become their own "economic castles." Rather they are very expensive and very aggressive "moats," funded by the height and magnitude of Google's castle. Google's aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

Google has organised this defensive play with precision. Carriers and handset makers that use Android are given economics to do so. The Android version of the "AppStore" shares the majority of its economics with the carrier and handset makers. Once again, they are not building a business, they are building a moat (sorry for the repetitiveness, it's intentional). Because they are "giving away" money to use their product, this creates a rather substantial conundrum for someone trying to extract economic rent for a competitive product in the same market.

This is the part that amazes me the most. I don't know if a large organised industry has ever faced this fierce a form of competition – someone who is not trying to "win" in the classic sense. They want market share, but they don't need economics. Imagine if Ford were faced with GM paying people to take Chevrolets? How many would they be able to sell? What if you received $US0.10 for every free Pepsi you consumed? Would you still pay $US1.50 for a Coke?

Free software will always win

Android may be the end of the software industry as we know it. The combined market capitalisations of companies that build desktop operating systems, handset operating systems, mapping software (they give this away with Android also!), as well as internal software that helps to differentiate mobile devices is well over $US100B, and may be several times that. Yet, there is no economic law that necessitates that these industries remain in their current form. When software was first imagined as a business, it seemed like a miraculous dream. Because the variable costs were zero, you would make near 100% profit on each incremental unit that you sold. Perhaps the resulting counter-force to this is that if someone can afford to build a near equivalent code base, than they can at their option price to marginal cost ($0.00), the very definition of perfect competition.

One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here – in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents "perfect competition."

In Silicon Valley we like to make light of industries that are facing digital disruption such as newspapers, the record industry, and the movie industry, suggesting that their executives "just don't get it." Perhaps now we are witnessing the disruption of not just analogue businesses, but also formerly interesting digital businesses as well.

John Doerr, once said "The Internet is the greatest legal creation of wealth in history." Android may be the opposite of that, the greatest legal destruction of wealth in history.

Bill Gurley joined Benchmark Capital in 1999 after spending two years as a partner with Hummer Winblad Venture Partners. Bill spent four years on Wall Street as a top-ranked research analyst, including three years at CS First Boston focusing on personal computer hardware and software. His research coverage included such companies as Dell, Compaq, and Microsoft, and he was the lead analyst on the Amazon IPO. For the past twelve years, Bill has authored the Above the Crowd newsletter which focuses on the evolution and economics of high technology businesses. You can follow him on Twitter.


Comments

    Bill's nothing more than a devout Google hater, and quite possibly a frustrated closet Microsoft Fan Boy... Sure, Google is fighting for market share, but so is everyone else. The Chevy and Pepsi comments make sense, but little did he mention that Microsoft is paying Nokia billions of USD to make windows mobile 7 phones - which is essentially the exact same ploy to gain market share by "using" Nokia as a hardware supplier...

    I can see his distress in knowing Google has done what Microsoft was never able to do in such a short time. Apple are still limited to a couple of devices, and yet Android is on thousands of different devices on the market. In reality this isn't a "legal destruction of wealth" if you compare the OS to the bible in a sense, spreading the word across the world. Its more about giving people the choice. Ultimately, its the people who will decide the outcome.

    .. And sure, Android is a Juggernaut, but this is only half the truth. Its Google that is the true Juggernaut, in the same way that Apple has redesigned the smartphone - and Microsoft, well, always a bit late and never really ever in the race for mobile OS anything.. so nada...

    So Bill, its time to give up all those blue pills you've been popping in order to conjure all this Google hate. Android will probably win the battle, but who knows who will reign on top and eventually win the war. On pure numbers, you would have to assume it's got to be Google, but who really knows??

      Lol. Completely missed the point...it is not a case of loving our hating google, but stumpy an observation of their strategy and power. if you ask me, this is more of an hommage to the brilliance of google.

    "Free software will always win
    Android may be the end of the software industry as we know it"

    lol, wow.. heard that before...

    of course after the shining example of how free Linux dominated Windows... oh wait...

    also, didn't the EU just dominate Microsoft for just having IE as the DEFAULT browser!? its not like they were even making it THE ONLY browser!!!

    surely the same thing would happen to Google...

    but what ever... so what if Google do this and take over the world... they are basically just being the biggest open source douche in the world! you know the type... the guy who has some well paying day job, then comes home and does programming as a hobby and declares that all software should be free! (the most ironic example being where the guy's well paying day job is in I.T.)

    there is nothing stopping anyone else from doing what google's doing, Android is far from perfect... anyone can create an app store for Android, so software devs can continue to charge for their apps. and many Apps on android ARE ad supported! just like Android is apparently an ad supported OS! the best part? most of them are supported by ad companies THAT AREN'T GOOGLE!!!

    in short, this might be Google's goal... sure... but I'm still yet to see ANY evidence of them actually going about it AGGRESSIVELY! (Evily). Apple are still the most controlling, monopolistic, 1984 type company... ironically Google might beat them at their own game without even trying that hard...

    The Headline could well have been "Android the greatest creator of wealth in history". Just think global & lateral beyond the stock market (all the benefits to customers, developers etc al).

    The wealth destruction case and the moat analogy seem compelling.
    However, consider the network effect that is driving the IOS platform and all the iStuff.
    This is an ecosystem independent of the Googleplex
    and a very real threat to disrupt the mobile advertising business - the Google castle.
    Free software does not always win. Consider the no charge attempts to displace MS Office.
    I do believe having superior design and being the low cost producer is a recipe for success.
    Futhermore in the rapidly moving handheld design biz the tight integration of hardware and software is a big advantage.
    It will be fun to watch the Apple vs Google war play out as the other players race to the bottem - especially if you own Apple stock.

    here we go...another apple/steve job's fanboy...oh gosh gizmodo...your bias is appearing more and more often and more and more blatantly...

    people got it wrong...you guys aren't biased towards american product (eg..you guys hate nokia)...you guys really are...steve job's secret lovers o.o

    This business model is actually quite old. It is exactly the same business model that the TV networks have been using for decades and decades. FREE shows, free movies etc. They would even pay a lot of money to make their own shows, and just give them away! The classic advertising model.

    Whoa now - hold on a second.

    The whole focus of the article is off the marker - there is no such thing as the best, or the winner, or who comes out on top. These are all short time positions that will constantly fluctuate over the years.

    In today's economy, the winner is the business that is still in business.

    Eventually, according to science fiction, anyway, all devices will converge to the point of being the same for everyone. You can already see the rather dull responses to "the latest and greatest" devices occuring even now.

    Ahhaha Giz. And here I thought you guys were above posting this divisive, incendiary crap.

    It's basically the Glenn Beck of technology. Use incredibly dumbed-down, rudimentary analogies to confuse your audience with the complex.

    Google's not the 4 Horsemen of the Apocalypse. The very fact Google could get something like Android to be a huge success while starting from nothing shows that others such as MS and Apple with decades of experience and piles of money could also have achieved. The fact they didn't have the foresight of clout to deliver is their own undoing. Welcome to Economics 101.

    Perhaps this fellow, Bill Gurley, likes the kind of regressive tactics utilised by Microsoft & Apple rather than a system that frees up the developer's ability to develop. I agree with the first writer that Bill is a closet MS or Apple fanboi. Allowing developers to create is the greatest progress in software dev since the beginning of the patent trolling. These companies attempted to stop developers from creativity by suing them. I hope they die slowly & painfully...

    "Android may be the opposite of that, the greatest legal destruction of wealth in history."

    How many smartphones have been sold (and will be sold in future) as a result of Android? That doesn't seem like destruction of wealth to me, more like wealth creation.

    I had never been interested in mobile phones (not even the iPhone) until someone with an HTC Desire showed me Android. I bought one as soon as I could, and find Android's functionality and features amazing. Android is not perfect -- nothing ever is -- but the package as a whole is fantastic. Google's applications for it are truly useful, as are many of the third-party applications in Android Market. And I find some of the 'fun' applications such as Google Sky Map astounding.

    Think he just can't cope with the business model. While Windows and OSX attempt to blatantly sell software upgrades ad nauseum Google have realiased software really only costs to develop once, not at all when leveraging FOSS. Subsequently users get great software, for it's actual cost, nothing. I can understand why the public are being drawn to that. Paying continually for endless upgrades that have brought nothing in end user functionality for 25 years, driving nothing but an increasingly short hardware upgrade cycle, also unrequired, has been the business model for far too long. Great to see a modern company taking a new direction and one that benefits the end user as well as the share holder. Interesting that a win-win scenario does exist where everyone using MS/Mac have alway been in a coprporate (win), end user (lose) situation.

    On top of that Google do it in a more endearing way. No one things of Goolge as the evil giant/ Given they have to compete in the evil patent space invented by the likes of Jobs and Gates that also speaks volumes for the success of the company. Good on them. I for one will be happy to see the demise of the past 25 years of rape and pilage of the IT industry at the hands of dis-honourable people.

    What this illustrates is asymmetrical compeition, in which organizations don't try to directly compete for the same market, but try to build thei own business in one market while destroying someone else's business in another. An example: Netscape had a business selling browswers and Web server software. Microsoft gave them away. End of Netscape.
    More interesting might be VMWare vs. Microsoft. VMware makes money on virtualization software. Microsoft doesn't. Microsoft makes money on management software. VMware doesn't (as much). So Microsoft gives away the stuff that VMware makes, but pumps up the management tools, markets management tools as essential to virtualization, and creates new layers of management technology that can be monetized.
    Now, VMware buys Zimbra, gives it away or sells it cheap. Microsoft sells Office at a very high price. For every dollar that VMware loses on a new Zimbra customer, Microsoft may lose 10 on a lost Office customer. It's a broken capillary for VMware, a leaky artery for Microsoft.

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