Is Google Becoming the Next Microsoft?
Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last month, I discussed why Waze was a valuable prize for Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG). The Israeli online mapping company, which has 47 million active users, produces a popular “crowdsourced” map service, in which drivers update each other on road and weather conditions via mobile technology. Waze provides a more accurate picture of traffic problems than the green, yellow and red lines on major thoroughfares that Google Maps currently offers in certain countries.
Apple had wanted Waze for its mapping technology, after the embarrassing Apple Maps debacle forced it to stick with Google Maps on iOS devices. Facebook nearly acquired Waze for both its mapping technology and social network, since Facebook still depends on Microsoft’s (NASDAQ: MSFT) comparably clunkier Bing Maps for its localized results.
But in the end, it was Google that took Waze off the table, for $1.3 billion - higher than the $500 million and the $1 billion respectively offered by Apple and Facebook. Yet why did Google, which has arguably the most robust and popular map service in the world, need to vertically integrate a small mapping service like Waze at such a high price? That question has triggered a FTC antitrust investigation into Google’s true intentions, according to the Wall Street Journal. Let’s take a look at Google’s strategy behind this acquisition, and see if it’s in the best interest of the company’s shareholders.
Is Google the new Microsoft?
To better understand what Google is today, we need to compare it to its nemesis, Microsoft. In the 1980s and 1990s, Microsoft rose to dominate the home computer market the same way Google dominated mobile technology - through software.
Microsoft spread its operating system, Windows, across the fragmented market of IBM clones, completely marginalizing Apple, which based its business on a proprietary operating system designed for its own hardware. Today, Google has unified the fragmented handset market together under its Android operating system, just as Microsoft used Windows to unite PC manufacturers across the world.
By the late 1990s, however, Microsoft’s dominance of multiple markets and technology incurred the wrath of the FTC. The FTC ruled that Microsoft should not have bundled its web browser, Internet Explorer, with its operating system, Windows, which throttled the market growth of competing web browsers such as Netscape and Opera. A similar ruling was made in 2007, when an EU court forced Microsoft to remove Windows Media Player as a bundled part of the operating system.
The invisible ceiling
Today, Google is headed straight for that invisible ceiling as well, even though the company loves to promote its “good guy” image with its catchy company mantra, “Don’t be evil.”
Google’s primary business is search. Android is merely a vehicle to deliver its bundled search engine and ecosystem to the maximum amount of users as possible, in order to maintain its wide lead over competitors such as Yahoo! and Microsoft. The tactic is not that different from what Bill Gates attempted to do with Internet Explorer two decades ago.
In 2011, Google was cleared to acquire travel search engine ITA Software, which is the backbone search database for travel sites such as Orbitz and airlines such as AMR’s American Airlines, among other companies. Google brushed off accusations that the acquisition was anti-competitive, since it did not intend to sell airline tickets directly. However, Google’s plan was more subtle. It simply wanted its own search site, Google Flights, to be the first stop for travelers looking for the cheapest tickets, to expand its brand presence and reaffirm its position as the world’s default search engine.
All things considered, Google is an expert at building its competitive moat and ensuring that no competitor is ever able to breach its walls. That’s where Waze comes in.
The mobile mapping wars
Considering Google’s past tactics, it shouldn’t come as much of a surprise that the company would pay such a high price for Waze. By acquiring Waze, Google keeps it out of the hands of Apple and Facebook, which will keep the former dependent on its iOS service and the latter locked out and restricted to Bing Maps.
Over the past year, Apple has been searching for ways to rid its walled garden of Google’s presence. At first, it was with the rushed Apple Maps, which led drivers to non-existent cities and scenic drives along railroad tracks. Apple also introduced Siri as a means to bypass Google search, recently announcing that Bing would be Siri’s default search engine in iOS 7. If Apple acquired Waze, then it could rebuild its ailing Apple Maps application and integrate it with Siri for a “Google-free” experience.
Meanwhile, Facebook has been expanding its “Nearby” feature, which shows users nearby restaurants that their friends have visited and rated. This technology, if merged with Waze’s crowdsourced network, could create a larger social web that allows users to not only share information about restaurants and attractions, but also about traffic and weather as well. This would suddenly make check-ins seem less arbitrary and more useful, and make it more competitive with review sites such as Yelp.
Therefore, by acquiring Waze, Google keeps Apple crippled without a viable alternative to Google Maps and it prevents Facebook from becoming a crowdsourced mapping powerhouse. Those two reasons will likely be perceived as anti-competitive by the FTC, since Google has not only eliminated a potential competitor in Waze, but it has also kept it out of the hands of its competitors. Other mapping competitors are comparably smaller, such as Nokia, which owns NavTeq, and TomTom, which licenses is mapping data to Apple.
Google is also willing to allow Waze to remain in Israel, a key point of contention between Facebook and Waze that led to the breakdown of their acquisition talks last month. Waze’s CEO Noam Bardin and a small group of employees currently work at its U.S. headquarters in Palo Alto, California, while the rest of his 90 employees are based in Israel.
If Google is actually serious about integrating Waze’s operations into its own, then it should integrate its operations into Google’s own regional offices. Instead, Google’s eager willingness to pay $1.3 billion and its easy compliance with Waze’s requests indicate that it is more interested in keeping the company out of Apple and Facebook’s hands, above all else.
The Foolish bottom line
In the end, Google has a lot to gain from acquiring Waze, and its competitors have a lot to lose. Not only will Waze’s data make Google Maps a more social driving experience, it could also enhance its localized search capabilities to rival Facebook and Yelp. However, it also has a lot to explain to the FTC, which could end up blocking the deal and giving Apple or Facebook a second chance to acquire it.
I believe that acquiring Waze would definitely strengthen Google’s position in location-based services. Yet it could also lead it down the path of Microsoft and eventually be vilified as an anti-competitive bully that believes that it has a Manifest Destiny for controlling the entire Internet.
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Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!