Google is not Crazy

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Google is not Crazy

Last month, the New York Times ran an article which raised some questions about Google’s recent acquisitions and how they fit in with its larger strategy. Some analysts see Google’s acquisition of Nest in a positive light, however, the article noted, not everyone is convinced:

Colin Gillis of BGC Partners is more sceptical. “Do you trust Google’s management as visionaries?” he asked. The analyst questioned the Nest purchase. Making thermostats does not fit in with Google’s core advertising, he said. Neither does robotics.

In my view, this is not necessarily correct. Here’s why.

Google’s Vision vs Business Model

Google defines it’s mission as: “[…] to organize the world’s information and make it universally accessible and useful.” Their pursuit of this mission is clearly seen in Google Search, but also its academic publications search, e-mail, social, scanned books, and other services. It’s perhaps harder to see that mission in driverless cars and “thermostats” (assuming that’s what Nest’s business really is). Nevertheless, I think the mission is still there. But today I want to talk about Google’s business model. In terms as simple as its mission, what would you say Google’s Business Model is? Here’s my take:

Sell precisely targeted advertising.

The mission and the business model are not the same. That’s OK, they shouldn’t be the same. The role of the business model is to support the mission. Google’s business model is deceptively simple. Yes, they sell advertising. However for Google (and Facebook, and maybe Twitter), the point is that the advertising is precisely targeted, because of Google’s access to consumer intent through its search engine, Gmail, Google+ and other services.

Limits to Google’s Business Model

There is, however, a limitation to this business model. It is this: Most of what we do in our lives we do “offline” to Google. Most people, most of the time, buy products in physical stores. We drive cars, catch trains, visit friends & family and we do these things without necessarily letting Google know about it. If your business model was to sell precisely targeted advertising, and you realised that most consumer activity was actually happening without you knowing about it, what would you do?

Intermediation Model 2.0

What Google wants to do is intermediate our lives. A lot has been written about dis-intermediation as being the defining feature of the current change sweeping the business world. But it would be more accurately described as re-intermediation. In the past, newspapers aggregated consumer eyeballs and then sold those to advertisers. Then they got dis-intermediated (and unbundled, and out manoeuvred, and et hoc genus omne). But that hasn’t meant that you get your news directly from journalists. Rather, you get it from the new aggregators and intermediaries: Google, Facebook, and Twitter.

Similarly, Amazon disrupted the book retailing market, and with its Kindle service, is now in the position to cut out the publishers completely. But again, it hasn’t meant that you buy your books directly from authors. You buy them from the new intermediaries: Amazon, Apple, and Google. Google is in the intermediation business. By learning everything it possibly can about us, it’s able to sell very precisely targeted advertising, and effectively mediate consumer access to service providers. And it can make a lot of money doing it.[1]

Google is not “Predicting the Future.”

Let’s revisit the analyst’s reservations about Google:

“Do you trust Google’s management as visionaries?” […] Making thermostats does not fit in with Google’s core advertising [business]. Neither does robotics.

Except, yes they do. They fit because Google’s advertising is precisely targeted based on what it knows about us. What do you think a home thermostat connected to the Internet could tell Google about the people who lived there?

What correlations might Google discover between thermostat settings and, say, disposable income? What happens when the Nest product suite branches out to gather more than just temperature data? What about noise levels? Movement? Air quality? Could a Nest sensor infer the emotional state of a household based on voice intonations? Could it infer what people are watching or listening to based on background noise? Imagine having Shazam running all the time, only it identified more than just music but also news stories, movies, TV shows… Might that be interesting to an “advertising” company?

What could a self-driving car tell Google about where people went, and how often they went there? Would the car see interesting events on its travels? What would it hear people inside talk about? Do you think it might want to talk back? What would it say? Anything here interesting to an “advertising” company?

What about robots generally? Who will the robots work for and what will they do? If we delegated service consumption to an automated system that worked for us, would a company that wants to mediate your consumption of services want to know about it? Robotics is key for Google because it offers the potential for Google to break free of the digital interface straight-jacket that is mobile and desktop computing. The robot will be the new service interface. Does anyone really doubt that owning a slice of the new service interface wouldn’t make any company salivate?

Summary

TL;DR?

  • Google is not in the “advertising” business as traditionally described. It is in the business of service intermediation. They are one of the new service intermediaries.
  • The service intermediation business requires advertising that is precisely targeted for its advertiser customers to get real value. This targeting requires large volumes of data about the target consumers. Google is missing data about our “real-world” interactions, and sensor companies like Nest can fix that for them.
  • The (automated) service interfaces of the future are not the screens and keyboards we know today. “Online services” is going to break out of the constraints of mobile and desktop computing and into the physical world via “robots” and other automated services that can manipulate their physical environment.

Google will be able to learn more, and then mediate our service acquisition, in more places and more often. So no, Mr Analyst who asked a rhetorical question that I will answer anyway: No I don’t think Google’s founders are visionary. I think they are lucky to be where they are, and they’re following up that advantage with some very canny business development.

Notes:

  1. I’ve gone back and forth calling this model “mediation” vs “intermediation”. Google isn’t quite doing either, because it’s not really interested in getting in between the parties to a transaction. It just does the introduction, but the service value between supplier & customer doesn’t flow through Google. Standard economics doesn’t seem to draw much of a distinction, but then after 3.5 minutes of Googling I’m no expert. 😉

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